In 2019, only 51% of Americans had life insurance coverage. Even more surprising is that only 30% of Americans have the life insurance coverage they need.
As a responsible adult, you know you have to consider all kinds of insurance needs. From health insurance to car and homeowners insurance, you need a whole lot of insurance protection.
You might be one of the 49% who doesn’t have life insurance and are now ready to consider it. But it can be confusing with so many different types. What is the best life insurance for your needs? How do you make sure you have the coverage, both type and amount, that you need?
Read on for our comprehensive guide on life insurance. Learn about the types of life insurance you might consider and everything you need to know once you’re ready to get life insurance too.
Table of Contents
What Is Life Insurance?
Life insurance is a type of insurance you pay premiums for while you’re alive. This establishes a contract between the policyholder (the person paying premiums) and the insurance company.
Once the policyholder dies, then death benefits or the insured amount is paid to the beneficiaries named by the policyholder before their death.
Types of Life Insurance
As you consider the best life insurance for your individual and family needs, let’s take a look at the different types of life insurance available.
You’ve probably heard of term life insurance and whole life insurance. These are the two main types of life insurance. Yet, when you look more closely, there are many versions of these two main types of life insurance to consider. Let’s take a closer look at the types of insurance to consider.
Term Life Insurance
Term life insurance is one of the main types of life insurance, with several variations on this type available. When you buy term life insurance, you purchase it for a certain term or number of years.
Most term policies are in place for 10 years, 20 years, or 30 years. Most insurance companies will write a term policy for the number of years you request and adjust the rate accordingly.
With term insurance, in most cases, you pay the premium during the term of the insurance. If death benefits have not been paid at the end of the term, you no longer pay premiums, and the insurance coverage ends.
Term life insurance can provide longer-term coverage and still remain affordable, which often makes it one of the more popular choices for life insurance coverage.
Level Term Life Insurance
This is another form of term life insurance. In level term insurance, the premiums never change over the course of the life of the policy. This can mean the rates are a little higher since there’s a guarantee they won’t increase. The advantage of this type of policy is that you always know what rate to expect over the policy course.
Increasing Term Life Insurance
Unlike a level term policy, the increasing term policy does have a rate change over the course of its life. The policy starts out lower when you’re younger, as you’re at a lower risk for dying. Over the course of the policy, the rate increases as you age. Some insurers will call this type of policy a yearly renewable term policy.
Return of Premium Life Insurance
A return of premium policy is an interesting option for term life insurance. You pay the premiums over the term of the policy. If no death benefits have been paid at the end of the policy, you’ll be refunded your money back. The premiums during the life of the policy also remain level, and you pay the same amount throughout.
Permanent Life Insurance
Permanent life insurance is different from term insurance. As long as the policyholder still pays the policy, the life insurance will remain in place. You can have it for your entire life until you die without it expiring as long as the premiums get paid.
Single-Premium Life Insurance
The single premium is for people who have some money to invest and don’t want to bother with monthly, quarterly, or yearly premiums. You pay the premium in one lump sum up front and then are covered.
Whole Life Insurance
This is probably the most popular type of permanent life insurance. It doesn’t expire like the term does, but it also acts as an investment tool. The value of the policy accumulates cash value over time as you pay your premiums.
Some people will use whole life insurance to save for things like college or retirement. The policy grows your money, and you can take it back out later to use. Whole life is also an investment option when you max out other investment options and need to put money away and have it be tax-free.
Universal Life Insurance
Universal life insurance is one version of permanent life. It offers a cash component to grow your investment and make interest. The benefit to this type of insurance is premiums more in line with term insurance. One key difference is that both premiums and the number of death benefits paid over time can be adjusted.
Guaranteed Universal Life Insurance
This is similar to universal coverage above but doesn’t build value. Again, the benefit is the lower insurance premiums, more like term insurance than whole life.
Variable Universal Life Insurance
Like the original universal variety, the variable universal has a cash value. In this version, the policyholder can invest the cash value from the policy.
Indexed Universal Life Insurance
In another version of the universal life option, the policyholder can earn an income of sorts from the fixed or equity-indexed rate of return on the cash value component.
Burial Expense Life Insurance
While the name suggests the policy intention, burial expense insurance policies are usually smaller in amount. The intention might be to use the death benefit for funeral expenses. However, the beneficiaries of the policy can choose to use it however they like.
Guaranteed Issue Life Insurance
Some of that percentage of uninsured from early in the article would say they don’t have insurance because they’re worried they wouldn’t qualify, often because of a medical condition.
This is a type of permanent insurance that allows those who are potentially uninsurable to get insurance. They pay benefits knowing if they die during the first two years of coverage, no death benefits will be paid out. If they do die during those first two years, all premiums are returned to the beneficiaries.
After the two-year window, when the policyholder dies, death benefits are paid to beneficiaries.
Pros and Cons to Term Life Insurance vs Permanent Whole Life
For our purposes here, we’ll focus on general term and permanent insurance. There are benefits and drawbacks to both options.
Term life insurance tends to be less expensive because it’s only good for a certain period of time. This is the negative, though. You want to buy life insurance to know you can care for your loved ones after you’re gone. It can be hard to predict when you’ll die and how long to get on your term policy.
Permanent whole life erases the issue of how long the term is needed. Because it’s permanent, as long as you pay premiums, you have the policy. The downside of this option is that this kind of benefit costs more money.
Life Insurance Riders
As you consider life insurance options, one way to adjust the policy is by adding a rider, so the policy best fits your needs. Adding an insurance rider to your policy means you can customize a policy.
As you meet with your insurance agent, discuss your specific needs so you can create a policy that fits your needs best.
When Is It a Good Time to Consider Life Insurance?
Most people purchase life insurance because it’s important to them to care for their loved ones after they’re gone. So, as they gain more responsibilities in life, more debt, have families, the desire to make sure there is money in the event of death becomes greater.
When is the right time to get insurance? Whenever you start to have people, bills, or a business that counts on you, it’s time to consider life insurance.
Many people know it’s time for life insurance when one of these life events happens:
- Newborn baby
- Buying a new house
- Getting married
- Concerns over your health
- Investments for college tuition or retirement
If you’re a business owner and have business loans and insurance, you may also be required to have life insurance to cover the debts of your business should you die.
What Affects Your Life Insurance Rate
As you seek life insurance quotes and work to decide on the best policy for you, it’s important to understand what factors insurers consider when quoting you a rate.
Two of the biggest factors of an insurance rate include your age and your general health. Most life insurance policies will ask you to complete a health screening and even have a basic health exam. They will want to know what medication you take as it can paint a picture of your overall health.
How Much Life Insurance Do You Need?
One of the challenges when buying life insurance is the amount of coverage to get. How much will your beneficiaries need to be cared for after you’re gone?
Most companies have life insurance calculators to help you figure out the amount of life insurance you need. You’ll want to start with your annual income. Most suggest you want 10 to 15 times your annual income in insurance.
Then you can consider a number of other factors that’ll help you get to an amount for your policy. Answering these questions can help you get the answer.
- Who will need help when I die?
- How long are these people likely to need financial support?
- Are there members of your family who have special needs or a disability?
- How much debt will you be leaving behind?
- How much money do you have in savings?
- Will money be needed for college tuition or retirement?
Once you really work out the possible answers to those questions, it helps you to get a better picture of what amount might be needed in your policy.
Application Process for Life Insurance
Once you’ve considered the best type of insurance for you and done some shopping around for the best-priced policy that fits your needs, you’ll need to complete an application for coverage. Insurance companies require an application, and coverage is not guaranteed for most policies.
You’ll need a host of documents to prove your identity, age, citizenship, income, and residency status. Most insurance companies require an application, and then you are screened via a phone interview.
It’s likely the insurance company will ask you to sign a release of health information and ask your doctor to do the same. Remember, the state of your health is a key factor in cost and approval for life insurance.
Then you’ll need a medical exam which is similar in format to a yearly physical. The insurance companies employ medical examiners who will come to your home or even office to complete the exam.
The insurance company underwriters consider your whole application and make a decision on coverage.
Answering Your Life Insurance Questions
There are a few common questions asked about life insurance.
Is life insurance taxable when it’s paid as a death benefit? The IRS says the life insurance death benefits are not counted as gross income. However, if you’re paid an interest from death benefits or investments following death, those are taxable.
You might be wondering if you’re a smoker if you’re eligible for life insurance, and how does it impact the rate? Smokers can get life insurance, but it’s going to cost more, likely lots more. Because of the associated risk of smoking for health problems, being a smoker will make your rates higher.
Once you get a life insurance policy, you’ll need to name beneficiaries who would receive death benefits. For some, the decision of who that is easy, a spouse, for example. But you can name whomever you want as your beneficiary. This is an important part of having a will and a solid estate plan.
For example, if you have minor children, you might want death benefits to go into a trust and earmarked for their care.
You and Your Life Insurance Needs
If you want to protect your loved ones after you’re gone, life insurance is a necessary evil of life. Many people struggle with considering their mortality. But purchasing life insurance is not only smart but responsible so you can make sure the people who count on you are secure after you’re gone.
Do you have other insurance needs? Or do you want to sit down and evaluate your coverage to make sure you have what you need? We can help. Contact us today to discuss your insurance portfolio needs.