Choosing the best type of life insurance for your needs is an important part of financial planning. If you’re new to the world of life insurance, it can be overwhelming.
Not sure how to choose the right type of life insurance policy?
This comprehensive guide starts with the basics (life insurance for dummies) and goes into detail on the different options you have when it comes to choosing between types of life insurance policies.
What is Life Insurance and Who Needs It?
Life insurance is simply a contract between you and an insurance company. When you purchase life insurance you make monthly payments, or premiums, to keep your policy valid. Premiums vary depending on your age, gender, medical history, and the dollar amount of your life insurance.
The insurer will provide for your family (beneficiaries) with a predetermined amount of money if you die.
The money can be used for:
- Supplementing for lost income
- Paying for medical bills not covered by health insurance
- Funding a dependent’s college education
- Paying off a mortgage
- Paying for a funeral
Life insurance is all about caring for and protecting your family after you are gone. As a general rule, if you have dependents you need life insurance.
What is the Best Age to Get Life Insurance?
Experts say 30 is a good age to purchase life insurance. The younger and healthier you are when you enroll, the lower your premiums will be, and you can lock in long term life insurance coverage for very cheap.
As you get older, life insurance rates become higher. Life insurance rates for seniors are significantly higher (usually 2-3 times) than younger people because they have less time to pay the premiums over the course of the policy’s life.
How Much Life Insurance Coverage Do I Need?
Life insurance policies can be flexible and change over time. The amount of life insurance you want to invest in is typically directly related to your income and responsibilities.
When you are at your peak earning potential, with dependents to support, you will need the most life insurance. Wondering how much is enough? This chart shows the amount of money your family would need to replace a lifetime of earned income.
As you can see, the need for life insurance typically shrinks as your grow older. This is because your kids grow up leaving you less financial dependents, your mortgage gets closer to being paid off, other outstanding debts become smaller.
As a result, less life insurance coverage is needed when you grow older. This is not true in all cases of course, but for the most part, it is a trend that holds true in the market. These above estimates may not be exact for your age and salary range, but they are safe estimates based on aggregate data.
There are Only Two Types of Life Insurance Policies
What are the different types of life insurance?
Most insurance policies fall under two main umbrellas: term life insurance and whole life insurance.
What is the difference between term and whole life insurance?
The key differences in the two types of life insurance are the period of coverage, the payout, and protection provided.
Different types of life insurance are designed to suit the needs of different individuals at their unique stages of life.
Next is an in-depth look at each type of life insurance policy including how it works, its value, limits, and risks.
About Term Life Insurance
Term life insurance is the most popular form of life insurance. Below, we’ll explain everything you need to know.
What is term life insurance and how does it work?
Term life insurance is a policy with coverage for a specific time limit. Normally 15 years, 20 years, 25 years, 30 years, but policies can be longer.
If the person dies during the set term (or time period), the insurer pays a death benefit to the beneficiary. However, if the person does not pass away during that set term, then no payout of any kind is received by the beneficiary. In addition, no part of the premiums is paid back.
Term life insurance is the most basic option that can be purchased. It is affordable because it offers pure death benefit protection only.
If you are wondering, what happens to the cash value of my life insurance after I die? In the case of term life insurance, there is no cash value.
The insurance company pays a death benefit to your beneficiary after you die, but no cash value has accrued over time. You cannot withdraw money from term life insurance or borrow against it.
If your term ends and you are alive and well, you can typically choose to convert the policy into a permanent policy (if you qualify). You’ll probably have to undergo a health screening and premiums are may be much higher.
The maximum age to qualify for term life insurance is 75-80 years. Most term life insurance policies do not expire until the insured reaches age 95. You can often continue your existing policy by keeping up with your monthly premium payments.
Term Life Insurance Rates By Age
Age, gender, health, and lifestyle choices such as smoking will all play a factor in determining premium rates for term life insurance.
The chart below shows the sample monthly rates for the popular 20-year term life insurance policy with $500,000 of coverage. Both female and male rates are shown, as well as smokers, vs. non-smoker rates.
Keep in mind that typically, smokers can expect to pay 2-5 times more for life insurance than non-smokers. Also, keep in mind that female life insurance rates often run 10-20% lower than male life insurance rates because of differences in life expectancy.
Getting life insurance quotes on policy rates is a quick and easy complimentary service provided by insurers.
Now that we have an idea of the cost of term life insurance for different age and health groups, let’s take a look at the common types of term life insurance coverage.Types of Term Life Insurance
Term life insurance is a very general category of life insurance. There are actually four main types of term life insurance.
Fixed Term Life Insurance
Fixed or level term life insurance is all about locking in a fixed premium payment. Your premium is guaranteed to stay the same for the entire time period of your policy.
Heads up- the longer the term, the higher the premium will be. 10 year, 20 year, and 30 year terms are all popular fixed life insurance policy plans.
Increasing Term Life Insurance
Maybe you’ve waited until later in life to get life insurance. With this policy, the death benefit your beneficiaries receive increases each year you have the policy.
As the death benefit goes up, so will your premium- usually between 2% and 10%. The increase in the death benefit will match with the increase in your premium. This policy is best for short term users.
Decreasing Term Life Insurance
A decreasing term life insurance policy is designed for short-term needs. If a certain expense would burden your family, like a mortgage for example, this type of life insurance policy could be perfect for you.
Designed to cover specific expenses, the amount owed decreases each year. Correspondingly, the death benefit decreases each year as well.
Annual Renewable Term Life Insurance
An annual renewable term life insurance policy is usually an extension of a previous term policy.
It is meant to continue providing coverage for an additional term or terms, up to a certain age, even if your health would cause you to be rejected if you applied for a new life insurance policy.
Notably, a renewable term policy allows you to extend or renew your policy for an additional term with no medical exam. Premiums are based on the age and health of person when they begin the term and policy. This is policy ideal for anyone who may be in declining health.
Other types of term life insurance include: convertible term, return of premium. For more information, contact the best term life insurance companies – Protective Life, Banner Life, AIG, and Prudential. These trustworthy insurers are consistently ranked high in customer satisfaction and financial stability.