Why get life insurance? First and foremost, to protect your family and those who depend on you for financial support. All life insurance will provide a payout to your beneficiaries if you pass away, but different kinds of policies can provide other benefits as well. The best way to start learning about your options is by seeing how easy it can be to get that protection.
What Is Life Insurance?
A life insurance policy is a contract between you and an insurance company. In exchange for regular payments, called premiums, the insurer pays out money after you die. This payment goes to the people you choose as beneficiaries — usually children, a spouse, or other family members. It can be an important safety net if anyone depends on you financially. Beneficiaries can use the money to repay debts, replace your income, or provide funds for future expenses like college tuition.
Key Takeaways
- Life insurance is a legally binding contract that pays a death benefit to the policy owner when the insured dies.
- For a life insurance policy to remain in force, the policyholder must pay a single premium up front or pay regular premiums over time.
- When the insured dies, the policy’s named beneficiaries will receive the policy’s face value, or death benefit.
- Term life insurance policies expire after a certain number of years. Permanent life insurance policies remain active until the insured dies, stops paying premiums, or surrenders the policy.
- A life insurance policy is only as good as the financial strength of the company that issues it. State guaranty funds may pay claims if the issuer can’t.
What type of life insurance do I need?
1. Term life insurance
A term life insurance policy is an agreement between you and a life insurance company: You agree to pay a premium for a specific period of time (usually between 10 and 30 years); in return, there is a guaranteed death benefit that the company promises to pay to your beneficiaries (typically your family).1 The death benefit is almost always paid out in an income tax-free lump sum of cash.2
Term life insurance is simpler and typically more affordable than permanent life insurance, such as a whole life insurance policy that provides life-long protection. Whole life policies have an added “cash value” component that can build up a valuable tax-deferred asset – money you can use during your lifetime.3,4 A term life policy has no cash value component: once the life insurance term is over, there’s no value or payout to your family.
| Pros | Cons |
|---|---|
| An affordable form of coverage | No cash value component |
| Provides coverage while it’s needed most | Coverage is not permanent |
| Highest death benefit amount per premium dollar | Once the term expires, there’s no payout |
| Affordable for young, healthy policyholders | Typically more expensive to renew when you get older |
2. Whole life insurance
Whole life insurance is a type of permanent life insurance that helps protect your loved ones in the future and your finances now. Whole life insurance policies offer two primary benefits: a guaranteed death benefit paid to your beneficiaries when you pass away, as long as you continue to pay the premium, and a cash value that can be withdrawn or borrowed from during your lifetime.
3. Universal life insurance
Universal life insurance (UL) is one of the two main types of permanent life insurance (the other is whole life insurance). Like whole life, a universal policy can provide lifetime protection while building cash value with tax advantages. UL also gives you the flexibility to raise or lower premiums within certain limits, so it can cost less than whole coverage. But it also offers fewer guarantees than whole life because if you make minimal premium payments for too long, it can impact cash value growth and the size of your death benefit.
Who Needs Life Insurance?
Life insurance provides financial support to surviving dependents or other beneficiaries after the death of an insured policyholder. Here are some examples of people who may need life insurance:
- Parents with minor children—if a parent dies, the loss of their income or caregiving skills could create a financial hardship. Life insurance can make sure the kids will have the financial resources they need until they can support themselves.
- Parents with special-needs adult children—for children who require lifelong care and will never be self-sufficient, life insurance can make sure their needs will be met after their parents pass away. The death benefit can be used to fund a special needs trust that a fiduciary will manage for the adult child’s benefit.
- Adults who own property together—married or not, if the death of one adult would mean that the other could no longer afford loan payments, upkeep, and taxes on the property, life insurance may be a good idea. One example would be an engaged couple who take out a joint mortgage to buy their first house.
- Seniors who want to leave money to adult children who provide their care—many adult children sacrifice time at work to care for an elderly parent who needs help. This help may also include direct financial support. Life insurance can help reimburse the adult child’s costs when the parent passes away.
- Young adults whose parents incurred private student loan debt or cosigned a loan for them—young adults without dependents rarely need life insurance, but if a parent will be on the hook for a child’s debt after their death, the child may want to carry enough life insurance to pay off that debt.
- Children or young adults who want to lock in low rates—the younger and healthier you are, the lower your insurance premiums. A 20-something adult might buy a policy even without having dependents if there is an expectation to have them in the future.
- Stay at home spouses – stay at home spouse should have life insurance as they have significant economic value based on the work they do in the home. According to Salary.com, the economic value of a stay at home parent would have been equivalent to an annual salary of $162,581 in 2018.3
- Wealthy families who expect to owe estate taxes—life insurance can provide funds to cover the taxes and keep the full value of the estate intact.
- Families who can’t afford burial and funeral expenses—a small life insurance policy can provide funds to honor a loved one’s passing.
- Businesses with key employees—if the death of a key employee, such as a CEO, would create a severe financial hardship for a firm, that firm may have an insurable interest that will allow it to purchase a life insurance policy on that employee.
- Married pensioners—instead of choosing between a pension payout that offers a spousal benefit and one that doesn’t, pensioners can choose to accept their full pension and use some of the money to buy life insurance to benefit their spouse. This strategy is called pension maximization.
- Those with preexisting conditions—such as cancer, diabetes, or smoking. Note, however, that some insurers may deny coverage for such individuals, or else charge very high rates.
How to buy life insurance
Through your workplace
A good place to start is your workplace, as your employer may offer life insurance at lower group rates. If offered, think about enrolling. It’s generally affordable and easy to buy. Your employer has done the work of finding a policy, and enrolling typically requires little more than signing a form. You may be able to obtain this coverage without taking a medical exam or providing medical records. However, the coverage amount offered may be limited, and you might want more protection to help provide financial confidence to your loved ones. Fortunately, other options are available.
Online
If you don’t have workplace coverage – or you want to supplement it – it’s easy to shop for term life coverage online. Many companies, including Guardian, make it simple to compare rates by giving you instant online quotes with tools that provide an outstanding user experience. On the other hand, if you’re looking for whole or universal coverage that builds cash value, it’s harder to find a permanent life insurance quote online. These types of policies can and should be tailored to your individual needs, so it’s worth your while to talk things over with an experienced financial professional.
Working with a financial professional
If you’re considering permanent life insurance – or you’re not sure what kind of protection is best for you – it’s a good idea to work with a financial professional. He or she can provide in-depth insurance information about the options that fit your immediate needs and long-term goals. If you have a financial professional you trust, ask them how much life insurance and what type of policy you should have. Otherwise, Guardian can connect you with a financial representative who will listen to your needs, tell you about the best ways to meet those needs within your budget, then help you decide.
Myths About Life Insurances
- Life insurance is expense. Cost is often given as a reason for not purchasing life insurance; however, 80% those who give this reason overestimate the cost. There are a wide variety of policies to fit different needs, and term insurance policies are extremely affordable. A $200,000 20-year term policy for a healthy non-smoking male, age 35 costs about $150 a year.
- You have health issues…you won’t qualify. While good health certainly makes life insurance more affordable, having a health condition doesn’t automatically mean you’re uninsurable. There are companies that write policies for a range of health conditions if they are under control; however, they will be more expensive and often have lower limits.
- Life insurance provided by your employer is enough. Even if you enjoy this benefit at work, it may not be enough to cover your needs. If you leave your job, you may lose your life insurance, and if your health deteriorates, you may find yourself ineligible to purchase a policy at a later date. Even with a conversion option, it may be more cost effective to purchase your own policy now.
- Buy term insurance and invest the difference. Term insurance is a great value and good for covering debts and other expenses with a specific time frame. Yet, a permanent policy may be more advantageous if you have needs that require coverage for your entire life. If you had to purchase another term policy later in life to extend coverage, it may be more cost effective to purchase a non-term policy at the outset.
- You’re young and don’t need to be concerned about life insurance yet. When you’re young, the annual premiums are less expensive. While you may be paying a premium for a longer time, the lower premium can fit into your budget easier as you get older. Also, the longer you wait the greater the chances of having a health issue arise that would make it more expensive or challenging to get coverage.
- Your single and don’t have dependents so you don’t need life insurance. Even if you’re single, you probably have debts that could be a burden to your family or executor. Also, just because you’re single now, doesn’t mean you will be forever. Getting life insurance now may be more affordable than waiting.
- Only breadwinners need to be insured. Stay at home spouses provide a lot of value maintaining a household and providing child care. The cost for a surviving spouse to pay someone to handle those tasks could cause a financial strain. Both adult contributors to a household should be insured.
- Shopping many different agents saves money. Every company has different insuring criteria, which makes the process time consuming and challenging to undertake on your own. Even talking to multiple agents can be confusing as you’ll have to make sense of all the differences. By working with one trusted agent that deals with a large number of companies, they can do the work for you and use their expertise to narrow it down to the best options saving you time and money. At Murphy Insurance, we work with over 50 different companies when searching for the best solutions.
FAQs
What are the benefits of universal life insurance?
Universal life is a flexible way to get a permanent life insurance policy and build cash value. The premiums are flexible: you can raise or lower payments within certain limits set by the insurance company. It can be a solution to cover people with variable incomes because the cash value also allows them to make withdrawals and policy loans.
What are the disadvantages of universal life insurance?
With more options than term or even whole life coverage, a UL policy can be complex. The policy needs to be managed: you need to determine how much you want to pay for premiums, and with variable UL, you also have to make investment choices. Those variables, along with a cost of insurance that increases over time, can affect and even detract from the value of your cash value. So you also have to keep an eye on your value balance over time: If it goes down to zero, your premiums could go up, or the policy may lapse.
What is the difference between whole and universal life insurance?
A UL policy gives the insured person many of the same permanent protection and benefits as whole life coverage, along with the added benefit of a flexible premium to help accommodate variable earnings. In addition, depending on the life insurance company and policy, you may also have the option to invest your cash value in a variety of market-based investment options, giving you the potential for more growth. On the other hand, universal life offers fewer (and/or lower) cash value guarantees.