What Type Of Life Insurance Is Best For Me?

Aside from costs, one of the main reasons why Americans don’t bother getting life insurance is the lack of a better understanding of it. In other words, it’s tough to really answer the question of “what type of life insurance is best for me” if you don’t know anything about it.

This is based on the results of a 2015 Insurance Barometer study conducted by LIMRA and Life Happens (a non-profit). The following data is based on their findings:

• Only about 35% were aware of how their credit history and driving records affect how much they will pay for life insurance
• About 25% of the participants don’t know how much they need and what type of life insurance is right for them
• Around 80% of consumers incorrectly estimate the price of term life insurance
• Millennials overestimate the cost of term life insurance by as much as 213%, GenX by 119%

Based on these figures, a huge chunk of the American population is in the dark when it comes to purchasing a life insurance. This article aims to change that.

Types of Life Insurance

While you’ve probably been overwhelmed by the different types of life insurance (Variable life, Guaranteed Universal, Accidental Death, etc.,), in general it can be categorized into two: Term Life and Permanent Life Insurance.

So what’s the difference between the two, you ask? Well, to keep things simple, I like using the analogy of renting versus owning a house.

Term Life Insurance can be thought of as “renting”. For example, you pay monthly dues for your apartment so you can have a place to live in for a set amount of time. It’s cheaper, however, you don’t have any ownership in the property. After the contract (term) expires, you’ll have to renew it, and almost always at a higher price than the previous contract.

Permanent Life Insurance is like “owning” a house. It will be more expensive than renting an apartment (term) but the price will remain level for life (like a mortgage). Since it’s designed to last a lifetime, protection will continue until your death.

No need to renew it after 20 years, for example. Also, one important feature of permanent life insurance is its cash value. Like building equity on your home, the money you allocate to pay the premium creates cash value that grows tax-deferred at the guaranteed interest rate.

• Term Life Insurance
  • Gives you the most protection for your money dollar for dollar
  • Provides coverage for a set amount of time
  • Price to renew coverage will be higher
  • No cash value
• Permanent Life Insurance
  • Coverage lasts as long you’re paying premiums
  • Cash value compounds and accumulates free of taxes
  • You can collect the cash value (after the first few years) tax-free as long as it doesn’t exceed your premiums
  • Typically, quite a bit more expensive than term life

*Note that this comparison is under the assumption that the client is healthy

So which of the two is better? Answer—it depends. In reality, no two persons will have the same needs or situation to allow us to recommend only one type of insurance all the time.

The number one factor that affects the decision when choosing between the two? Cost.

Term life insurance is significantly cheaper compared to a permanent life insurance. It’s recognized as the easiest way of getting life insurance because the way it works is pretty much straightforward.

Just note that it will only cover you for the term of the contact (10, 20, 30 years), after which you’ll have to renew it at a higher price. Note that most people don’t have a reason to renew it because the kids will be out of the house and they been saving over those years as well.

On the other hand, permanent life insurance is perhaps the best choice for people looking for lifetime coverage and protection. It’s also the right pick for anyone looking for some sort of asset build-up strategy for boosting their bottom line.

Which type of Life Insurance should I get?

Now that the differences and strengths of each option are clear, it’s now time to take what we learned and apply it for making a sound decision based on various situations and lifestyle.

• Single without dependents – If you don’t have anyone who depends on you financially, life insurance isn’t exactly a must. Perhaps you might consider a cheap and simple policy instead for funeral and burial costs so you can help your loved ones with the expenses. Otherwise, you probably don’t need any.
• Newly-married – Couples usually have access to better coverage and rates if they combine their policies under the same company, for example. Also, life insurance policies will get pricier as you both age so getting one when you get married can help you land a more affordable policy.
• Bought a new house recently – It’s a good idea to get at least term life insurance after purchasing a new home. Protecting against the loss of income should the person paying the mortgage pass away is important.
• Expecting a baby – Arguably the best time to get insurance. It’s important to get coverage to ensure financial support for the child and the surviving spouse.
• Approaching retirement – It’s usually around this time when people’s coverages start to expire. If you try to get a new policy, the price will be significantly higher.

Let’s now look at some of the most common life insurance questions we run across.

Common Life Insurance Q&A’s

1.   Why do I need life insurance?

If you have someone relying on you financially, it’s simply a must. It will help compensate for the loss of income that goes along with the loss of life. Also, it helps ease the financial burden for the surviving family both for funeral and burial costs and while they’re adjusting financially during the first few months or years.

It’s especially crucial if you have children. A life insurance policy gives you the peace of mind that your loved ones and surviving family will have financial assistance when you die. Lastly, if you have existing loans or debts, life insurance can help to pay them off, including estate taxes.

2.   When should I buy life insurance?

Some experts say that the optimal age is 35, however, it could be earlier or later depending on your situation, as ultimately the deciding factor will be if you have someone that relies on your financial support.

Delaying it too much can be costly. For example, let’s say the average price of a 30-year level policy that has a face value of $100,000 is $160 annually for a healthy 30-year old male. That’s significantly lower versus the $220 per year that a 40-year old male will need to pay.

Also, medical conditions might develop as a person ages so the chances of being assessed for a higher monthly premium will also increase.

3.   How much Life Insurance coverage should I get?

There is no fixed formula for this, though you’ll probably hear some recommendations that it should be around 10 times your annual salary. While it sounds like a good base number to reference, in reality, there are a number of factors that need to be considered to determine your magic number.

So what do most people do to come up with a rough estimate of that magic number? Usually, their first step is to sum up all existing payables or debt. Stuff like mortgage, car loans or student loans for example.

Next, they determine how much income their insurance policy should be able to replace. Note that their salaries will probably increase annually so that should be taken into account too.

Another approach for getting an estimate is to use online insurance calculators. Our Instant Quote feature, for example, will give you a life insurance quote in seconds–for free.

But if you want a tailored approach, it’s best to talk with a financial professional. An experienced advisor can conduct a personalized analysis for you based exactly on your needs.

4.   Where should I get life insurance?

Well, you’re in luck because here at NextGen Life Insurance, we’ll help you compare rates and benefits from top life insurance companies (with no obligation to buy) in just mere seconds!

Our free life insurance quoter gives you instant access to information you would otherwise have to manually sort through and compare (and, it can take a lot of time). For a more detailed approach, you can also talk to one of our experienced advisors.

5.   Do I need to take a medical exam?

Yes, in most cases. Though there are some insurance policies that do not require a medical exam. Those tend to be pricier though. Also, it may affect the limits on how much coverage you can get since the insurer will be taking on more risk.

Understand that a medical exam is a crucial step in the process of applying for insurance as it will allow your insurer to properly assess your condition for coming up with an appropriate policy (and create a full medical history for the policyholder).

There are two stages in a medical exam: Verbal questionnaire (a medical professional will conduct an interview) and standard sample collections. Tests for blood and urine are strictly required. To be better prepared, make sure to ask your insurer what types of tests will be conducted during the exam.

6.   Can I borrow money against my policy?

For a term life insurance, no. However, some other types like Universal Life (and some other forms of Permanent Life) may offer this feature. It will allow you to borrow from the cash value savings of the policy.

Whatever money that is owed will be deducted from the benefits (when claimed). Borrowing is a pretty straightforward and easy process but understand that there are disadvantages for taking a loan.

When you take a loan against your insurance, any unpaid interest will be added on top of the loan amount will be compounded (you’re essentially paying interest on your interest). Also, unpaid interest accrues as income and gets added on top of your loan balance.

As a tip, make sure to diligently monitor your loan as it has the potential to cause a lot of headaches especially if you ask your insurer to pay the loan interest via the cash value or with dividends.

7.   What are the penalties if I can’t pay my premiums on time?

For term life insurance, most companies typically provide a grace period of around 60 to 90 days. On the other hand, permanent life insurance policyholders have more options.

Since there’s a cash saving feature in their policy, it can be used to pay for premiums. These are usually called automatic premium loans, you’re basically borrowing against the cash value of your insurance.

8.   Are death benefits adjusted for inflation?

It depends on the policy. Some insurers feature an automatic adjustment to keep pace with inflation while some offer it as a separate rider. Make sure that you ask the insurer if the product you’re getting will automatically adjust the death benefit for inflation and if you’ll be allowed to purchase more insurance down the road.

At an average inflation rate of 3% per year, the actual benefit you can claim in, say, 30 years will be reduced significantly and could potentially ruin your financial goals.

9.   How long will it take before I see returns?

This is a question from policyholders of permanent life insurance which have a cash value feature. The important thing to remember is that life insurance policies are set up as long-term investment vehicles that may take anywhere between 5 to 10 (or even more) years before you can see positive returns.

10. What things should I consider when choosing a life insurance company?

First off, your list should be the company’s credentials, history, and track record in the life insurance industry. You can contact your state insurance department for information on how the insurer has been dealing with its previous and current policyholders.

The information you can obtain may include disputes on claims, sales misrepresentations, premiums, policy cancellations, and others. Doing this will allow you to get an idea of how the company conducts its business. You can learn a lot about a company’s credibility by doing this first step.

Next, check the company’s financial stability. Think about it, you’re buying a product for a benefit that may be awarded decades from now. This means the company should be financially strong enough to last and pay you benefits in the future.

Independent rating firms like S&P Ratings Services, Fitch Ratings, A.M Best, and Moody’s Investor Services rate insurance companies using grades. Note that there is no standard grading system across all firms so make sure to learn how their ratings work.

11. What if I change my mind and decide to return the policy?

Insurance companies usually provide a time frame of between 10 to 30 days upon receipt of the policy should you not find the contract satisfying and want a refund of premium. This is referred to as the “free-look” period.

This notice is required to be displayed on the front page of your contract. It’s recommended to discuss any questions you might have with your insurer during this time to ensure that the product matches your needs.

12. Can I replace my current life insurance policy?

Yes. However, keep these following factors in mind when considering replacing your current policy:

• It’s likely that you’ll be paying a higher premium price since you are older compared to the date of purchase of the original policy
• Consider making changes on the policy instead of replacing it completely. Talk with your insurer for options. They might be able to provide you with more favorable options versus a full policy replacement.
• If your policy has a cash savings feature, costs for having this feature may be charged again for replacing the old policy with a new one.
• Surrender charges are likely if the current policy was closed/replaced during the surrender charge period.
• Contestable and suicide provisions will start anew in the new policy

13. I used your site’s free life insurance quote service. What does “Health Class” mean?

Health Class is a system used for determining one’s health which in turn affects how much they will pay for life insurance. It can affect how much policy coverage you can get at each price bracket. Essentially, if you’re a healthy person, you’ll get a better classification which results in better rates. Here are the 4 main classifications used for Health Class:

• Preferred Plus: Excellent health, ideal weight and height ratio, no family history of medical conditions, clean lifestyle, lowest premiums.
• Preferred: You won’t get the best deals like what’s available to Preferred Plus users due to a few minor conditions (high blood pressure, high cholesterol, etc.,)
• Standard Plus: In good health in general but might have a few outliers that need monitoring. Height and weight are not ideal.
• Standard: Your medical test results came back with some notes, some known issues in family’s medical history, weight and height not ideal, etc.
• Smoker (Additional): Usually classified further as Preferred or Standard. Due to the added risk, you’ll be paying more in premiums

14. Can I have multiple beneficiaries?

Yes, absolutely. You can also update your list of beneficiaries on a regular basis.

15.  Can I have more than one life insurance policy?

Yes, you can. Let’s say your company provides a term policy as part of your benefits. Should you want additional coverage, you can buy a new one elsewhere or choose to pay extra on your company’s group policy for additional benefits.

Choosing the right life insurance policy can be a daunting process especially if you’re starting from scratch. With literally hundreds of insurance packages and companies to choose from, it can be hard to figure it all out on your own. Let us help, our free online life insurance quote engine will get you moving in the right direction.