Life Insurance 101

What Form of Life insurance is Best For Me?

Life Insurance 101
March 9, 2016

There may not be just one correct type of life insurance for you, because your life insurance needs are likely to change over the course of your lifetime. First, let's look at the two basic types.

  • Term Life – In term-life insurance, your coverage is for a specified term (period of time) and a specified benefit amount, and your premiums are only applied toward the insurance benefits. Most financial experts and planners recommend term life as the best economic option, compared to more expensive permanent life insurance.

  • Permanent Life – Permanent life coverage extends for your entire life – in other words, it is as permanent as you are. Permanent life policies have two components – a death benefit to be paid to your beneficiary and an investment component. You pay higher premiums that are split into these two components. The investment component, known as cash-value, is invested by the insurance company for your benefit. You may have investment options and more flexibility with premiums and benefits depending on what type of permanent insurance you purchase (whole life, universal life, or variable life).

    Insurance companies and agents usually recommend permanent life policies – which is not surprising, since they typically benefit insurance companies and agents. Permanent life insurance may still best for you, but keep in mind where the advice is coming from.

Which type is right for you? Consider these factors:

  • Length of Policy – If you plan to hold an insurance policy for over twenty years, permanent life makes more sense, as you will have passed a crossover point between the higher payments you make and the benefits you receive. As your expected policyholder time gets shorter, term insurance makes more sense.

  • Age and Responsibilities – As a young single person with new responsibilities, you may have better uses for your money than life insurance – but for most people starting out with a new career and family, term life is a reasonably inexpensive option. If instead you opt for permanent insurance at this point in life, pay close attention to it. Monitor its cash-value and don't let it lapse through missed payments. You will only benefit if you are in it for the long haul.

    As you approach middle age and your children get older, you have a decision to make as to whether to continue with term life policies or switch over to a permanent life policy. The longer you wait, the less likely it becomes that a permanent life policy will be worth the extra premiums. Assess your future obligations– college tuitions, home purchases, etc. and decide whether your money is better placed in a cash-value portion of a permanent policy or applied to other expenses or investments.

    As you approach retirement, replacing a term-life policy may be difficult or impossible because your risk factors have increased. However, if you have planned properly and have significant investments and retirement income, you probably do not need life insurance in retirement at all – unless you have started a second family late in life or have other beneficiary responsibilities.

  • Investing Time and Acumen – If you have the time and at least moderate investing skills – or a savvy investment advisor – you can probably generate a better investment return than you will get from the cash-value portion of a permanent life insurance policy. If you tend to be reckless with investments, a permanent policy is a reasonably secure way to go (although if you are that bad with your own investments, seek an independent opinion before buying a permanent life policy to help you understand exactly what you are buying).

For most people, term life insurance is preferred because of the lower expense, but there are situations where permanent life makes more sense – for example, if you are a conservative investor who has trouble saving, and you plan to keep the policy for a long time.

Check the fine print on any policy and make sure you understand all of the terms before buying, and you should be able to make the best decision for you and your family — but whatever you do, don't leave those who are depending on you without sufficient security.

  Conversation   |   9 Comments

Add a Comment

By submitting you agree to our Terms of Service
Steffanie | 03.10.16 @ 16:46
Thank you for this comprehensive list. There are so many different options out there and having them compiled in one article is so helpful.
Kamie | 03.10.16 @ 16:46
I never realized there was so much that needed to be read into having life insurance or getting life insurance, figured it was pretty black and white with what is being disclosed in the forms and contracts.
Alec | 03.10.16 @ 16:46
Life insurance is something my husband and i have discussed but I think we'll need to get opinions from older family members and a professional on which kind of insurance is best. We don't want our daughter to suffer, nor do we want each other to suffer, so we'd really need to look in to the details to figure out what we wanted.
Erin | 03.10.16 @ 16:46
Thank you for clearing up some of these confusing terms in one article. It's sometimes hard to know which kind of life insurance to invest in, and this helps quite a bit.
Ron | 03.10.16 @ 16:47
I am only able to get life insurance through my job as I am a transplant patient and the only policies, if any, offered to me would be the same as saving my own money in an account set only to benefit someone after my death. Not worth the paperwork of the policy itself. Not all life insurance is created equal
Carla Truett | 03.10.16 @ 16:47
I have often wondered about the differences between these two types of insurances. We have a permanent Life policy on each of us.
Meredith L | 03.10.16 @ 16:48
I've been thinking about getting a term life insurance policy but I'm still researching options to make sure I can switch it to a whole life policy later on before it expires - without feeling like I lost money for investment purposes later.
Amanda | 03.10.16 @ 16:49
Nice list and simple break down of each. I'm in the market to getting life insurance as I keep waiting to sign up. I'm not getting any younger. Always had trouble remembering what each one of these were for.
Thank you all for responding. It is often the case that the people who need life insurance the most are also the ones who find the topic the most challenging. We would all like the topic to be somewhat black and white since that makes it seem simple. What makes it seem anything but simple is the fact that life insurance policies are actually contracts, written such that "translation" may be needed. Over time, carriers keep changing the offerings, which means more and different contracts that you can purchase. You could easily get confused, and the confusion often comes from being curious and wanting to know more so that you can get the right coverage. Ouch! As usual, I recommend looking in the mirror before you look to insurance info. Here's why: when you are looking for coverage, know that the tool you are looking for is one that will have a specific purpose. That purpose will always have something to do with the people and the stuff that you see in the mirror. If you stare at insurance info without first looking in the mirror, what you will see will be many things - but not exactly your thing. That is where the overwhelm can start. When you look in the mirror and see your loved ones, your eventual retirement, your income, and (add anything that is of value to you here), you are looking at the primary reasons for having coverage. Now that you have that in mind, find out what tool can best achieve the intended result. They say that when your car is in first gear that is the hardest work to be done because you have to go from not moving to moving. Once you are moving, it is easier to keep moving. With regard to life insurance, if you are just beginning to do the work of investigating policies, your drive will be easier if you don't fix your destination too soon. Ask questions to get the discussion moving. Then, ask more questions, gather more info, and move forward. Kirby Thomas .
$commenter.renderDisplayableName() | 12.10.16 @ 18:48
{comment}

  Our Professionals Are Available to Help!

  Can't find What You're Looking For?