Finding the right life insurance and selecting the right policy that suits your needs can be challenging. However, we are here to help you through that process.
Nowadays, you can get life insurance to cover a range of debts and expenses. You can even buy life insurance to grow your wealth over time.
This guide will explain the different types of life insurance you can get in the USA, help you figure out how much life insurance you should get, and tell you how to find the best plan.
Life insurance is a contract between a policyholder (client) and an insurance company to provide financial coverage for a person’s beneficiaries when they die.
A policyholder makes regular payments either per month or per year. In turn, the life insurance company guarantees that it will pay a death benefit.
The purpose of life insurance is to provide financial protection to a person in case of death.
Term life insurance provides coverage for a limited period. You can look at it as an insurance policy with an expiration date.
Permanent life insurance has no expiration date and offers lifetime coverage to policyholders as long as they continue to pay their premiums.
You also get supplemental life insurance plans, such as AD&D insurance, which provides people with insurance coverage in case of unforeseen events. However, these are not a replacement for term and permanent life insurance.
Beneficiary: A person who receives the death benefit (payout) from a life insurance policy in the event of the policyholder’s death.
Life Insurance Premiums: These are monthly or annual amounts that policyholders pay to keep their coverage.
Death Benefit: This is the amount paid to the beneficiary of an insurance policy after the policyholder’s death.
Living Benefits: These are any benefits that a policyholder can use while they are alive. The most common example is a cash value account. However, insurance riders such as disability cover or AD&D cover are also considered to be living benefits.
Cash value account: This is a type of saving account that policyholders with permanent life insurance can use to build up additional wealth through their policy.
Insurance Riders: An insurance rider adds benefits to an insurance policy or extends its coverage. They customize coverage to fit the policyholder's needs. The insured person pays an extra premium for riders.
Life insurance premiums depend on the policy value (the payout amount) based on your health, age, and gender. Most plans require that you go through a medical exam and you’ll have to take a health questionnaire.
Insurers will also ask about:
Your driving record
Any medications you take
Your tobacco use
Your profession and interests
Your family background and medical history
Let's look at the term, permanent, and other life insurance plans available in the U.S.
One of the most popular types of life insurance is term life. Term life insurance is a life policy that pays a specified death benefit if the insured dies within a specific period.
The purpose is to provide a family with enough money to cover expenses for a while if it's no longer possible for the policyholder to work and earn money.
Term life insurance is also useful for:
Providing financial coverage for a mortgage
The payment of other specific debts that would be transferred to another individual
Providing funds for children until they graduate from college or helping them afford tuition and living expenses
If you’re thinking about purchasing a term life insurance policy, consider these two factors:
How long the policy should last
Term life insurance policies generally last for 10, 20, or 30 years. However, some insurers offer multiple term lengths ranging from 5 to 40 years.
Keep in mind that insurance companies generally keep all of the premiums you paid for term and permanent life insurance, even if your policy is canceled. You won’t receive a refund for your premiums unless you have something called a “return of premium term life insurance rider.”
A return of premium rider is a specific clause in your life insurance contract. It states that if your policy is cancelled, all of your premiums that you paid until the cancellation will be returned to you.
For example, let’s say you paid $250 each month for ten years and your insurance provider cancels your cover. If you have a return of premium rider in your contract, you will get back all of your premiums ($30,000) and your coverage will end.
In most cases, term insurance is much less expensive than permanent insurance.
Nonetheless, with age, life insurance costs can become very expensive. Once a term expires, you need to reapply to continue coverage.
You will also have to pay more for insurance if you've developed health issues since you first applied.
For instance, if you are an overweight 65-year-old male with mild health problems, your monthly premiums might exceed $700 for a $500,000 term policy that lasts until you turn 85.
A level term policy is one of the most common types of life insurance, where both the premiums and the benefit amount remain the same (or level) for the duration of the policy.
This kind of term insurance is an inexpensive way to provide protection for someone who wants to make sure their children’s schooling, upbringing, and other costs are taken care of.
For example, if you're 30 years old and healthy, it might cost you $24 each month for a $500,000 level term insurance policy.
However, if you bought a whole life policy (permanent life insurance), you might pay $455 every month to cover the same death benefit.
When you purchase decreasing term life insurance, your premiums remain the same during the policy term.
However, the death benefit will decrease over time, which is ideal for covering a specific debt paid off throughout your life.
With this type of policy, you can rest assured that your loved ones will be able to settle any debts (usually a mortgage) in the event of your death.
Additionally, mortgage lenders typically require that you have life insurance in place before approving your loan.
Since the death benefit of this type of policy is smaller than that of level-term policies, it is generally a lot cheaper.
Annual renewable term coverage will enable you to renew your policy annually, without requalifying or reapplying once the term ends.
Insurance policies like these can be appealing to young individuals looking for an affordable, flexible rate.
A death benefit will also be paid to any named beneficiaries within the one-year period.
A named beneficiary is the person that a policyholder chooses to receive the death benefit from their policy.
This makes renewable term coverage possible if you develop health problems that prevent you from maintaining coverage under a new policy. This is sometimes referred to as guaranteed renewable term coverage.
However, if you renew your policy the rate will increase according to your age and will continue to rise each year that you renew coverage. In some cases, you may also be required to go through a medical exam again.
Permanent life insurance is a type of life insurance policy that will last your entire lifetime. It will provide you with permanent coverage that will keep increasing in value as you age.
There are three types of permanent life insurance: whole life, variable life, and index life.
Policyholders of permanent life insurance can enjoy lifelong coverage and develop cash value, which accumulates tax-free.
For these reasons, permanent life insurance is often more expensive than term life insurance.
Cash value is the interest you earn on your policy that can be withdrawn or borrowed if necessary. It is guaranteed to make a minimum rate of interest.
If you fail to pay your premiums or payments are inadequate, the cash value will be used to cover costs and the policy may expire.
Universal life insurance and whole life insurance are both types of cash value life insurance because they have a cash value component.
Permanent life policies can be canceled or surrendered at any time, in which case the account will be paid out as cash value. However, based on the policy's terms you might also be charged a surrender fee.
If you are thinking about cashing in your policy, you will have to pay penalties to get the surrender value (the value of the contract if you want to end your coverage).
There are usually administration fees and a surrender fee, which will be deducted from the surrender value of your policy.
For example, let’s say you have a policy with a surrender value of $54,000. If you decide to end your coverage, your life insurance company may charge you a $5,000 surrender fee along with administration fees ($2,000).
This means you’ll only receive $47,000 ($54,000 - ($5,000 + $2,000)) if you surrender your policy.
If you’re choosing permanent life insurance, you need to consider the policy's flexibility, investment risk level, and costs. Permanent life insurance does not make sense for those without long-term coverage needs.
People usually buy permanent life insurance for the following reasons:
Whole life insurance is a type of permanent life cover that will last for the policyholder’s entire life as long as they pay their premiums.
Whole life insurance has several advantages over other forms of permanent insurance. A significant benefit is its predictability due to the guarantees contained in the policy.
The policy's cash value component will also grow tax-free. Taxes will only apply if you surrender the policy for a cash payout. With whole life insurance, any death benefits paid to your beneficiaries are tax-free.
There are also some downsides to whole life insurance, as it can be more expensive than a term policy and it may be more restrictive.
With whole life cover, you will always be guaranteed a fixed premium rate, cash value return, and payout.
For example, if a 25-year-old purchases a whole life insurance policy, it will provide them with a lump-sum payment upon reaching the age of 45, after 20 years of premium payments.
Universal life insurance policies provide greater flexibility than whole life policies. Your premiums can be adjusted, and the policy’s value can be increased.
How your death benefit is paid out is one of the most important decisions you'll make with universal life insurance. There are two options:
Level death benefit: Death benefits remain the same throughout a policy's life. For example, if you purchase $100,000 of coverage and accumulate $60,000 as cash value for payments, your beneficiaries will receive $100,000 upon your death.
Combined death benefit: The death benefit is added to your cash-value account, your beneficiaries will receive $160,000 in the situation described above. Premiums are typically higher with this option.
Additionally, universal life insurance policies might not have fixed costs. Premiums go to the cash value account, and there are also policy changes and policy fees.
Indexed universal life insurance provides permanent coverage, which will last your entire lifetime and allows policyholders to deposit money in a cash value account.
Policyholders allocate their cash value amounts between different index accounts, which will grow at different rates depending on how the index performs.
For example, if you buy an indexed policy you can select the index you'd like to invest in, such as the Dow Jones or the S&P 500.
An index is a group of shares or stocks that a person can buy. These groups usually have a theme that makes them attractive to certain buyers.
For example, the S&P 500 is an index of the 500 largest companies being traded on the New York Stock Exchange (NYSE) and the NASDAQ.
The Dow Jones is a stock index of the thirty largest stocks being traded on the New York Stock Exchange and NASDAQ.
Policies of this type have a “cap,” or a maximum interest rate. Your policy will also include a “floor,” which is the lowest interest rate you can earn. In most cases, the floor is 0%.
An indexed universal life policy can grow significantly if the policyholder’s cash value is invested in indexes with high returns. However, they can also lose money if there is an economic downturn and the value of an index goes down.
When you have enough cash value in your index life policy, your premium can be lowered or paid in full without reducing the death benefit.
Variable universal life insurance plans also offer a cash value account along with a death benefit. These plans cover a policyholder for their entire life and will only end if premiums aren’t paid.
With variable life insurance the cash value that a policyholder has can be invested, usually in various mutual funds.
People usually buy permanent life insurance for the following reasons:
Due to the investment features, variable life insurance policies are generally more expensive and riskier than other types of life insurance.
Accidental Death & Dismemberment cover is an insurance policy for deaths resulting from accidents, or the loss of a limb or an essential function, like sight, hearing, or speech.
Typically, your beneficiaries will receive a lump-sum payment if you die in an accident. If you are injured, you can receive living benefits determined by the type of injury you suffered.
For example, an AD&D policy may pay 50% of the premium you purchase for the loss of a finger, a foot, or your eyesight, and 100% for the loss of multiple limbs or functions.
If you become paralyzed because of an accident, insurance companies may pay 50% to 100% of the compensation.
Disability insurance covers expenses caused by a disability or injury sustained at work or at home.
These policies are a type of supplemental life insurance that will ensure you can pay your bills and continue living as you did before your injury.
For example, let's say a person with disability insurance is injured in a car accident. If they are unable to work or can only work part-time because of their disability, their insurance will pay out a disability benefit to them.
Similarly, if they need special care or assistance because of a disability, they can use their disability cover to help pay for these costs.
Group life insurance cover is term insurance that is provided to several people at once. Group coverage is usually offered by businesses, which they offer their employees as an employment benefit.
Employers typically provide, at no cost to employees, group life insurance and additional coverage for employees' families.
A group term life insurance is relatively affordable and sometimes the total cost of the plan is covered by employers.
Our advice is to find out whether your company offers group life cover. If they do, sign up to get additional coverage for you and your family.
Survivorship life insurance is a type of life insurance plan that covers two individuals and only pays a death benefit after both have died.
Benefits can sometimes be paid before the passing of the first policyholder if a living benefit rider is included in the policy.
Many life insurance plans, including survivorship policies, have a living benefit rider at no extra charge. If a policy owner becomes terminally ill, this rider lets them claim a portion of the death benefit.
Finding a plan that's right for you isn't always an easy thing to do. Here are seven tips to help you find suitable types of life insurance.
To determine the type of life insurance you need, you must evaluate your financial situation.
Put a plan in place to provide financial support to loved ones, including an emergency fund, retirement accounts, and employer-sponsored life insurance.
Discuss your needs with a financial advisor, whether you have a mortgage to pay, children to support, a business to manage or a legacy to pass on.
The need for life insurance is often underestimated, and we tend to think only of our most considerable debt (such as a mortgage) when choosing coverage.
However, you should also think about how much money would be needed to support a partner and children, send the kids to college, or other long-term expenses.
Generally, you should have a life insurance policy that provides ten times your annual income.
However, you might need more or less depending on your situation and financial goals.
Term life insurance provides coverage for a defined period of 10, 15, 20, or 30 years. If you're close to reaching a specific financial goal like paying off your mortgage, this type of insurance could be a good idea.
Choosing the right life insurance policy will depend on your circumstances, financial goals, and overall debts.
However, a permanent life insurance policy offers coverage for the policyholder’s entire life, which is why the premiums are higher.
Money from the policy can be used for whatever you choose, from emergency expenses to supplemental income.
Insurers consider two key factors when determining your rate for coverage: health and age.
Buying life insurance when you're young is a lot cheaper because you’re healthier and less risky to insure when you’re young.
Rates also vary depending on the type of policy and the death benefit amount.
Your premiums will also be affected by the term you choose when buying term life insurance.
If you cannot afford a permanent life insurance policy now, there is the option to convert your term policy to permanent coverage when you can afford it.
Speak to a consultant from PolicyScout if you’re thinking of switching your permanent or term life insurance cover.
When you choose a policy, it's important to look beyond the premium cost. While life insurance needs to be affordable, you must also consider the coverage it provides.
Ask for free quotes online with the insurance company, do your research, and speak to your insurance agent about your concerns. That way you can choose the life insurance company that best suits your budget.
Life insurance applications can be long and there are many questions you’ll need to answer. It's important that when filling out an insurance application you do not leave out any relevant information.
When you go through your medical exam, insurers will ask you about your age, weight, family medical history, mental health, and tobacco use. They will also ask about your driving record and whether you have any dangerous jobs or hobbies.
This all determines the premium you will pay and the cost of the cover you will receive. Keep in mind that an insurance quote is typically only a rough estimate of what your premium will be.
Application procedures do not necessarily have to be invasive and there are plans that have no medical exam, such as guaranteed issue life insurance and final expense.
We know that choosing the right life coverage can be difficult. At PolicyScout, we have many resources to make this decision easier.
Check out our Life Insurance Hub to learn about other types of life insurance.
We have articles that cover term, permanent, and supplemental life insurance, as well as life insurance for parents, final expense insurance, and cash value insurance.