Choosing the right life insurance coverage often feels overwhelming. Not only does the average person prefer to not think about death, understanding how much coverage your family needs, as well as which type of insurance to buy, combines to make avoiding the topic altogether all too easy.
Of course, ignoring an issue doesn’t make it go away, and the fact is that you do need life insurance to ensure your loved ones are cared for when you are no longer here to protect them.
We’re here today to guide you through the process. We’ll explain the different types of life insurance, as well as coverage needs for different stages in your life.
Let’s get started!
The Four Types of Life Insurance Coverage
Though you wouldn’t guess it from looking at the all of the variations available, there are four main types of life insurance:
- Term life
- Whole life
- Universal life
- Variable whole life
The two most popular and well-known versions are term and whole life.
Term Life Insurance Coverage
Term life insurance policies are probably the most common forms due to their low cost, usually under $50 per month, and much lower when the policyholder is younger. These policies provide coverage for a set amount of years, assuming the owner continues making timely payments on his or her premium.
Standard term limits last between 5 and 30 years, and you may renew the policy at the end of the term, though typically at a higher rate, as these increase as you age. However, throughout the term of your policy, the rate remains the same.
Whole Life Insurance Coverage
Unlike term life, whole life policies remain in existence throughout the policyholder’s lifetime, assuming he or she continues making the required payments. These payments accrue over time, so that the policy works almost like a savings account. You may opt to let the cash value continue accruing, or you may use the policy as collateral for a bank loan, or even borrow against the policy itself.
Whole life policies come at a much higher price than term policies do, especially in the beginning, when the cash value and dividend payments are low. Dividend payments represent the other way your policy gains value, as the insurance company pays you every year that you own your whole life policy. After a certain amount of time, these dividend payments may be enough to pay your entire premium. However, it takes many years before that happens.
Your whole life policy is considered a conservative investment, one that many people use to round out their investment portfolio. As a permanent form of life insurance, it is a popular option for people looking to provide for their heirs.
Universal Life and Variable Whole Life Insurance Coverage
You often see these two types combined, because they are very similar to one another. They aren’t a popular option for most people, because of variables in cost, fees, taxes, and expenses inherent in these types of policies.
Both types fall under the same “permanent life insurance” umbrella as whole life. Like the other types, coverage remains in force so long as the policyholder continues making the required payments.
Universal life pays an interest rate of at least 2 percent, though the rate changes every year. Variable whole life invests the policy’s cash value into subaccounts, which fluctuate depending on how the funds perform. Most people prefer to open a brokerage account rather than absorb the numerous fees in a variable life policy.
Unlike whole life, these policies become more expensive to fund over time if the policyholder does not fund them well early on.
How Much Life Insurance Coverage Do You Need?
Determining the amount of life insurance coverage that you need depends largely on where you are in life. Are you young, with no dependents? Newly married? Newly retired? New parents? Each stage in your life comes with different insurance needs.
If You are Single with no Dependents or Newly Married
Typically, people without financial dependents do not require life insurance. However, some choose to acquire an inexpensive term life policy that will help defray funeral costs.
If you are married but do not yet have children, your insurance needs still change somewhat, especially if you purchased a home that requires two incomes to maintain.
If You are a New Homeowner
New homeowners typically receive an unprecedented amount of offers in the mail from a variety of sources, including home improvement stores, furniture stores, and insurance companies.
If you receive a mortgage protection insurance policy offer, you may wonder what this is. Essentially, its purpose is to protect you in the event something causes you to lose the income of one or more of the people responsible for paying the mortgage. This policy immediately pays off your mortgage if one of the responsible parties passes. Life insurance policies do not have that limitation; they pay the amount of money in the policy directly to you, to use as you see fit.
A term life insurance policy makes a better option, and usually less expensive as well, as it provides far greater flexibility. Mortgage insurance really only makes sense if you are unable to qualify for a term life insurance policy for health reasons. Please note, though, that you can typically get smaller term life policies without a medical exam.
If you have no dependents and only want life insurance for the amount of time it takes to pay off your mortgage, consider a term policy that covers that time period.
Are You Expecting a Baby?
It probably goes without saying, but the time in your life when you need life insurance the most is when you have children. If you do not already have life insurance, you need to buy some the moment you get the good news. Well, maybe not the moment, but as soon after as is feasible.
Preferably, you want enough insurance to help the surviving parent manage household expenses at least until your child turns 18, and you may also want enough to cover college tuition for each child. When figuring the amount, include cost of living adjustments in your calculations.
If you already own a life insurance policy, talk to your agent to determine your current coverage. If you bought the policy before having any children, you most likely need to increase your coverage. The same holds true for any future children; reevaluate your coverage whenever you experience a life-changing event.
Are You Retired, or Nearing Retirement Age?
If your life insurance coverage up to now was a term life policy, it likely ran out. If not, it’s much more expensive to buy term life as we age.
Think of life insurance like a bet. You’re betting the insurance company you will die. They are betting you will not die. As you age, that risk becomes greater. This is why life insurance premiums rise with age.
A whole life policy remains in effect throughout your lifetime (again, assuming you make the required payments).
People who saved adequately for retirement have less need of life insurance, especially if their children are now independent adults. If you had children when you were older, however, you may still need to carry a life insurance policy. It depends on how healthy your retirement savings are, and whether these funds are adequate to support your surviving spouse.
Talk to an Agent Today
If you’re ready to purchase life insurance coverage for the first time, or need to evaluate or expand on your current coverage, contact San Tan Insurance today for a quote. We can answer your questions and help you determine the amount of coverage you need, and which type of insurance is best for you and your family.