Did you recently get married? Or thinking about starting a family? These are two of the most common life events that bring about a need for life insurance. Today we will discuss the different types of life insurance.
As you begin to research life insurance, you may have realized that there is a lot of information out there. Quotacy is here to make the life insurance buying process easier for you.
What are the different kinds of life insurance?
Term Life Insurance
Term life insurance is the most affordable life insurance option for families. The coverage lasts a specific period of time, called a term. These terms range from 5 to 40 years, availability depending on your age.
If the insured person dies within that term, the life insurance company pays the coverage amount (the death benefit) to the beneficiaries of the policy. Even if you die one day after the policy is activated, the life insurance company still pays the FULL death benefit. However, the insurance company is allowed to investigate the claim if the insured dies within the first two years of policy activation.
Permanent Life Insurance
Permanent life insurance contains many different policy options. The most common are whole life insurance, universal life insurance, and guaranteed life insurance.
All permanent life insurance policies are designed to last until you die. Depending on the type of permanent policy, there also may be a cash value accumulation component and it may pay dividends. Because of the extra beneficial features of permanent life insurance, it’s often 10-20 times more expensive than a term life insurance policy with the same coverage amount.
Employer-Sponsored Life Insurance
You may have life insurance as part of a benefits package through your job. This group life insurance is likely term life insurance, accidental death and dismemberment life insurance, or a mix of both.
Group term life insurance typically caps at $50,000 and it’s not yours to take with you if you leave the company. Your employer may pay the premiums on this coverage—so it’s a nice benefit—but if you have a family, it’s important to buy your own individual term life insurance in addition.
Accidental death and dismemberment insurance (also known as AD&D) is another common form of employer-sponsored life insurance. This type of coverage pays a death benefit if the insured dies as a result of an accident only. For example, it would pay out for death resulting from falling off a ladder, but not cancer. It also pays out a portion of the benefit if the insured is dismembered in an accident. For example, if the insured lost a foot in a boating accident the policy pays out a certain percentage of the benefit, like 50%.
No matter which kind of life insurance you ultimately decide on, know that you’re making a loving decision for your family.
Which kind of life insurance do I need?
Term Life Insurance
In most cases, an individually-owned term life insurance policy is the best option. It provides coverage for a specific amount of time to replace lost income due to the unexpected death of a provider. The life insurance proceeds (death benefit) can cover funeral costs, mortgage or rent payments, and help pay for your children’s education. The beneficiary can use the proceeds however they wish.
There aren’t too many bells or whistles, which makes term life insurance the most affordable type of life insurance available. You can add on certain benefits, which are called life insurance riders, to customize a term policy for specific needs, but for the most part term life insurance is straightforward and simple. If you die during the term, the policy beneficiary(ies) will collect the death benefit. If not, the policy will end once the term is over.
If a life insurance policy is individually owned, versus employer-sponsored, this means you take the coverage with you wherever you go. It doesn’t terminate if you leave your job.
Term life insurance is easy to buy online though Quotacy. Run term life insurance quotes in less than a minute and see real-time estimated pricing without giving away any contact information. If you’re ready to see your estimated quote, head over to our term life insurance quoting tool now.
Permanent Life Insurance
Permanent life insurance provides coverage on an insured person for their entire life as long as the premiums are paid. With many types of permanent policies, a portion of these premiums go toward building cash value within the policy. This cash value accumulates year after year and the policyowner can take out tax-free loans against it or withdraw the cash like you would a bank account.
However, loans and withdrawals can reduce the death benefit your beneficiaries receive. The balance of the loan accrues interest and if you don’t pay it back, this amount plus interest is taken from the death benefit before it’s paid to your beneficiaries upon your death. In addition, if the balance and accumulating interest ever exceeds the policy’s total cash value then the policy will terminate.
Withdrawals cannot be paid back. It’s permanently subtracted from the cash value and the death benefit. This means there is now less cash value left to earn dividends, accumulate, and borrow against.
Permanent life insurance can be a great asset in the right situations. It’s worth considering if:
- You’re in a high tax bracket.
- You’ve maxed out all available retirement accounts.
- You want insurance to cover estate taxes when you die.
- You own a business.
- You have a loved one who will be dependent on you his or her entire life.
The first four considerations would likely be best matched with a whole life insurance policy or universal life insurance policy. There are risks and costs to these policies, but also tax advantages. Talking with an advisor is essential when buying a permanent life insurance policy since they are far more complex than term life insurance. Learn more about permanent policies and get quotes by heading over to our whole life insurance education page.
If you need permanent life insurance mainly to have lifelong coverage and are more interested in saving money versus the bells and whistles, then guaranteed universal life (GUL) insurance is a great plan to consider. Guaranteed universal life insurance is less expensive and simpler than other permanent products. You typically won’t get the extra features like cash value or dividends but you’ll have lifelong coverage as long as the premiums are paid.
Below you can compare the costs between whole life and guaranteed universal life policies. These applicants in this example are healthy and have never used tobacco.
|$250,000 Whole Life Insurance Policy||$250,000 Guaranteed Universal Life Insurance Policy|
|Male, 40 = $375 per month||Male, 40 = $172 per month|
|Female, 40 = $325 per month||Female, 40 = $153 per month|
Because guaranteed universal life insurance is less complex than other types of permanent life insurance, you can instantly see quotes and buy it online through Quotacy without needing to schedule a phone call consultation first.
Simply pop over to our term life insurance quoting tool, but instead of choosing a specific term length, move the slider in the Length of Coverage box all the way to the right to “Forever”. This will allow you to view quotes for all the guaranteed universal life insurance options available to you.
Both Term and Permanent Life Insurance
There’s no rule that says you have to pick sides. You are allowed to own both term life insurance and permanent life insurance policies. This is a common strategy for individuals who want lifelong protection, but can’t afford one large whole life insurance policy to cover all their needs.
The most cost-effective strategy is to buy enough term life insurance that will cover all your debt and financial responsibilities. And choose a long enough term length to protect your family until all or a majority of your debt is paid off. Then also purchase a small whole life insurance policy to simply pay for your end-of-life expenses. This may include your funeral or to leave behind an inheritance.
Maria is 30 years old. She’s an assistant account executive at a supply chain management company. She contributes 6% of every paycheck to her 401(k). She also has an employer-sponsored $50,000 group term life insurance policy.
At 32, Maria gets married. She and her husband each purchase a $500,000 30-year term life insurance policy naming one another primary beneficiaries. Her premiums are $30 per month.
At 33, she and her husband also each purchase a $50,000 whole life insurance policy naming one another primary beneficiaries. Her premiums are $51 per month.
When Maria is 34, they have their first child.
At 35, Maria and her husband buy their first home. In this same year, she’s promoted to account executive and receives a raise. She also opens an IRA account and contributes $200 to it each month.
When Maria is 36, they have their second child.
At 53 years old, Maria’s $50,000 whole life insurance policy has a cash value of $12,221. If she desired, Maria could withdraw from this amount or take out a policy loan against it.
At age 55, Maria and her husband are officially empty nesters.
At age 60, she and her husband send in their last mortgage payment.
At age 62, their individually-owned term life insurance policies end. Their whole life insurance policies are still active.
At age 67, Maria retires and her group term life insurance policy terminates.
Considering this example, if Maria died unexpectedly any time between the ages of 32 and 62, her husband would receive benefit checks of $50,000 (group term life insurance), $500,000 (individually-owned term policy) and $50,000 (whole life policy minus any policy loans and interest, if any).
After Maria’s individually-owned term policy ends and she retires from work, her husband would receive the whole life insurance policy’s death benefit of $50,000 (minus any policy loans and interest, if any) whenever she died. If her husband dies before Maria or at the same time as Maria, the $50,000 would go to the contingent—or back up—beneficiary.
Buying Life Insurance to Protect Your Loved Ones
No matter which kind of life insurance you ultimately decide on, know that you’re making a loving decision for your family. Life insurance is all about financial protection for the what-ifs in life.
Life insurance can’t prevent a parent or spouse or partner from dying, but it can help the loved ones they leave behind get back on their feet. If you aren’t sure what kind of life insurance is best for you, Quotacy advisors are here to help. If you’re ready to start the process, head over to our quoting tool to run term life insurance quotes instantly.
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