For today’s guest post on types of life insurance, please welcome insurance agent and fellow blogger Chris Huntley.
When it comes to life insurance, getting the wrong policy can be like flushing money down the toilet. On the flip side, getting the right one can adequately protect your loved ones without breaking the bank.
If you ask most life insurance agents which type is best, the answer is no surprise.
…it’s the one that offers the biggest commissions.
The two best types of life insurance
The whole point of life insurance should be to provide for your loved ones financially if you pass away without being a big financial burden now.
As such, here are the cheapest forms of life insurance that do the job well.
Term life insurance
Term life insurance is cheap because it typically only covers you for 10 to 30 years. The shorter the term of the policy, the cheaper it is because you’re more likely to outlive it.
If you die during the term of the policy, your beneficiary will receive the death benefit. But, like renting, you don’t get anything back if you end up canceling the policy.
Premiums are typically fixed during the initial term (10 years, 20 years, etc.). If the policy does finish its initial term and you’re still alive, most policies automatically adjust to an “annually renewable” premium format, where the premiums go up every year.
Because term life insurance is so affordable, it’s the best choice for almost every situation. It’s perfect for:
- Replacing your income
- Paying off debts like student loans or a mortgage
- Covering final expenses like funeral and burial costs
- Providing for future college costs
- Insuring a key employee in a business
- Funding a buy-sell agreement
By spending less on a term life insurance policy, you’ll also have more flexibility to work toward more important (and sexier) financial goals.
Guaranteed universal life insurance
The main drawback to term life insurance is that your policy might expire before you can save enough to be able to self-insure.
But here’s some good news.
There’s a permanent life insurance policy that can provide life-long protection without a massive financial commitment.
To be clear, guaranteed universal life insurance actually works like a hybrid product — like a mix between term and permanent insurance.
It’s similar to term because it offers a fixed, level premium for a set period established when the policy is purchased.
Like other forms of permanent insurance, guaranteed universal life may offer lifetime coverage. There’s also a cash value account tied to the policy, but it usually builds little cash value.
And as long as you pay your premium every month, your policy won’t lapse.
That’s all fine and good, you say, but how much does it cost compared to term and whole life?
…here are some sample term life insurance quotes for a healthy, non-smoker 30-year old male and female.
|Male, age 30||Female, age 30|
|30-Year Term Life||$20/mo||$33/mo||$17/mo||$28/mo|
|Guaranteed Universal Life||$99/mo||$198/mo||$85/mo||$168/mo|
As you can see, guaranteed universal life is quite a bit more expensive than term life. But in return, you’re getting coverage for life for much cheaper than with whole life.
Guaranteed universal life is a great option if you or your family actually needs coverage in the later stages of life.
For most families, though, who are looking for a short term solution to an unexpected death, term life will usually do the trick.
The two worst types of life insurance
Now that you know which policies you should consider, let’s also discuss the ones from which you should steer clear.
Mortgage life insurance
If you’ve ever bought a house, you’ve probably heard of this. Here’s how it works:
The death benefit on the policy starts out equal to your mortgage balance. But over time, the death benefit decreases as you pay down your mortgage.
And here’s the kicker.
…your premiums stay the same the whole time.
That’s right. Even when you only have a few months left on the mortgage and your balance is just a few thousand, you’re still paying the same premium as you were when the balance was in the hundreds of thousands.
Sounds like a great deal, right? But that’s not all.
These types of life insurance policies also typically cost more than the average 30-year term life insurance policy. That’s because they usually don’t require a medical exam, so the insurance company views you as a higher risk.
You can’t make this stuff up. If you’re worried about protecting your mortgage debt, opt for good ol’ term life insurance instead. You might also try using this lesser known mortgage insurance strategy, which is an even cheaper way to cover your mortgage than 30 year term.
Whole life insurance
This is one of the most expensive forms of life insurance. But it’s also one of the most popular, with the American Council of Life Insurers estimating that roughly 64% of policies in the U.S. are whole life.
As you can see from the table above, whole life can be as much as 10 times as expensive as term life insurance, or more.
What do you get from all that extra money?
…a long-term major financial commitment with a low return on investment.
Whole life insurance policies have a cash value account tied to them that grows over time, similar to an investment.
Now I’m okay with people who buy whole life insurance because they have health conditions and can only qualify for a “guaranteed acceptance” policy, or only need a small final expense policy like $10,000 to $20,000. These are typically whole life insurance policies.
Where I’d steer clear would be using whole life as an “investment.”
Unlike a typical investment account, you take serious risks if you skip your monthly payments (or you might think of them as “contributions”), especially in the policy’s early years. If you fall on hard financial times and can’t pay your premium, whole life doesn’t usually allow you to skip payments. It will borrow the premiums from the cash value, which you must pay back. But in the early years, when cash values are low, there may be no money to borrow. The policy could lapse and you could potentially lose your entire “investment.”
Insurance agents love to point out how you can avoid these unfortunate life events from hurting your policy by adding special riders to your policy that let you skip payments if you lose your job or become disabled, as examples.
But they don’t cover a host of other unforeseen expenses that could come up.
A few examples would be:
- My brother is in financial trouble and needs a personal loan
- My mother has cancer and needs help paying for treatments
- Car or home repairs
- Or I just see a better investment opportunity elsewhere
By now you should be getting the point that if you do buy whole life, you should have a steady income so you don’t miss payments, and be mentally prepared for the fact that you’ll rarely be able to miss a payment in the first few years of the policy.
It can also take 10 to 20 years to start seeing significant growth from the cash value account. Dave Ramsey estimates the average annual return at an abysmal 2.6%.
Here’s a better idea:
If you have the cash flow to afford whole life, buy term instead and invest the rest. Even with a conservative investment return, you’d likely do much better than 2.6%. Check out this calculator to see just how much, and if you want to see a great example of breaking down term vs whole life insurance, read this whole life insurance story.
Decide now to save later
Getting the right policy now can save you hundreds or even thousands of dollars over the years. To make sure you’re getting the best fit for your budget, work with a knowledgeable and trustworthy life insurance agent who can guide you.