Shopping for life insurance can quickly become confusing. There are different types to consider, and your personal situation may make one option better than another. This guide will go over your options and explain the key differences that will help you make an informed decision on what coverage might be best for you.
Basics of life insurance
Planning for what happens after we’re gone is not fun, but it is important. In today's uncertain world, having the right life insurance policy is critical for protecting your loved ones and securing your family’s financial future. Finding the right policy now will leave you and your family better prepared to handle anything that comes your way. And you can’t put a price on the peace of mind that comes from knowing your loved ones are protected.
Do I need life insurance?
If your family depends on you financially, life insurance is essential. It provides a safety net for family members and can help ensure their future financially. Your beneficiaries can use the life insurance benefits however they choose, but common uses are funeral expenses, mortgage payments, covering daily living expenses, paying off outstanding debts, and covering educational costs. If you have life insurance, you’ll know that your loved ones will be taken care of, and they’ll be able to maintain financial stability during a difficult time.
How much does life insurance cost?
The cost of life insurance varies depending on several factors, including the type of policy; the coverage amount; and the age, health, and lifestyle of the insured. However, it is generally more affordable than people think. Term life coverage of $1 million can cost as little as $18 a month for younger clients.1
Key terms and concepts
There are a few important terms that life insurance policies have in common. Knowing them will help you compare their differences:
- Policy owner: The individual who owns the life insurance policy and is responsible for paying premiums. The policy owner may or may not be the insured party.
- Beneficiary: The individuals or entities designated to receive the death benefit from the life insurance policy. Beneficiaries can be family members, friends, or organizations.
- Premiums: The periodic payments made by the policy owner to keep the life insurance policy active.
- Death benefit: The amount of money that is paid to the beneficiaries upon the death of the insured party. It serves as financial protection and can help cover various expenses and financial obligations.
- Underwriting: The process an insurance company uses to determine eligibility for coverage and to set appropriate premium rates.
- Medical exam: For many policies, you’ll need to get a checkup with a doctor to receive an offer. Options are available, however, that do not require an exam.
- Riders: Optional add-ons or modifications to a life insurance policy that provide additional benefits or customize the coverage to suit specific needs.
Term life insurance
Term life insurance provides temporary coverage for a specific term, typically of one, 10, or 20 years. When the term is up, the policy ends, unless it is renewed with new premiums. Term insurance is commonly used to provide financial security during important life stages that have an end date, like taking on a mortgage or seeing children through college. When buying a home, for example, you may want to take out a term policy that can pay off the outstanding loan. That way, if something happens to you, your family can stay put without worrying about continuing mortgage payments.
Term insurance offers lower premiums compared with other types of life insurance, making it a more affordable option for many individuals. However, it lacks the guaranteed lifetime protection of permanent insurance and has no cash value accumulation. Learn more about term life insurance.
Whole life insurance
Whole life insurance provides guaranteed lifetime coverage, meaning it remains in effect as long as you pay the premiums, which will never increase in cost. That makes it a great value over time. Through its death benefit, whole life insurance provides financial stability for beneficiaries and leaves a legacy for future generations. It also offers a cash value component that accumulates over time. The cash value can be accessed or borrowed against should you need it during your lifetime. Learn more about whole life insurance. The long-term benefits of Whole Life depend on making a long-term commitment to the timely payment of premiums.
Universal life insurance
Universal life insurance offers flexible long-term coverage and allows the insured to adjust premium payments and coverage amounts over time, within limits. Depending on the policy, may be able to increase, decrease, or even skip premium payments within predefined limits to adjust your life insurance benefit to fit your needs and goals. This can, however, make it more complex than whole life, and it’s important to manage your policy carefully. Like whole life, some universal life policies accumulate cash value that can grow over time and be accessed when you need it. Premiums for Universal Life are often lower than those for Whole Life, which may offer a broader range of benefits. Learn more about universal life insurance.
Variable universal life insurance
Variable universal life insurance is designed for those looking for protection and for potential market gains. It offers long-term coverage combined with investment options, allowing policy owners to allocate the policy’s cash value into different investment options and enjoy tax-advantaged growth within the policy. You can choose a preset portfolio based on investment style or pick from a list of funds yourself. While it offers the opportunity for substantial growth over time, it's important to note that all investments carry the risk of market volatility and the potential for loss. Learn more about variable life insurance.
Supplemental life insurance:
Supplemental life insurance means adding an additional policy to supplement the one you already have. This is common when you have an employer-provided life insurance policy that covers a few years of your salary. Many find that inadequate, and adding an additional policy of any type can provide important extra protection for you and your family.
Other types of insurance to consider:
Beyond life insurance, there are other insurance options that cover different aspects of life and aging. Sometimes, these can also be added to life insurance as a rider, forming a more comprehensive coverage plan.
Long-term care insurance:
You might be surprised to learn that health insurance and Medicare may not cover many of the common costs associated with aging, like nursing-home care, in-home care, assisted-living facilities, and rehabilitation services. These expenses can significantly affect your retirement, and long-term care insurance can help keep you financially secure.
Individual disability insurance:
One of your most important assets is your ability to earn a paycheck. If you’re unable to work because of an accident or an extended illness like cancer, individual disability insurance pays a portion of your earnings for a significant amount of time while you recover.
Comparing life insurance policies
Now that we’ve covered most of the basics, you’ll better understand your choices when it comes to life insurance policies. Here is a comparison chart:
Which is the best type of life insurance for me?
Ultimately, that is going to come down to you and your family’s specific needs and desires. If you can’t decide on the type or amount of coverage, it’s best to talk with a financial professional who can run you through your options and give you different scenarios and premium levels to help you make a decision.
1Monthly recurring premiums for a $1 million New York Life 30-Year Level Term policy, female, age 30, select preferred, as of 5/15/2023. (Subject to change.)
