Even if you took insurance law in law school, it probably didn’t teach you nitty-gritty consumer stuff. How do you choose the best life insurance policy? What kind of coverage makes sense for you? It depends on your circumstances and financial goals.
I’m Young. Why Do I Need Insurance?
You may not. You can’t take it with you. So if you only have yourself to look after, life insurance may be superfluous. But if you have a dependent spouse, kids, or aging parents, you should be thinking about the unthinkable. Emotional loss is devastating enough for families without piling financial insecurity on top of it. You don’t want that on your head, even when you’re dead. So what kind of insurance will take care of them after you’re gone? For many young people—those who want to protect their loved ones and not use life insurance as a financial tool—the answer is term life insurance.
Term Life Insurance
The most important thing to remember about term life is this: it has no value unless you die. It only pays out when you check out. There are two types of term policies: renewable and level term. With a renewable plan, your premiums will increase annually as you age. With a level term policy, you can lock in a rate, sometimes for up to 35 years. Even if your health declines, your rate won’t go up. Renewable term life premiums, by contrast, are adjusted each time your policy comes up for renewal. Your rates go up as you age and if you become ill.
There’s a catch with level premium policies, of course. When you’re young and healthy, your premium will be higher than it would be with a renewable plan. But some people appreciate the “no surprises” part of level premium insurance. It makes budgeting easier. And if you intend to remain insured long-term, level term policies have a lower lifetime cost than renewable ones.
Whole Life Insurance
Unlike term policies that provide only a death benefit, whole life insurance offers a living benefit; it’s an asset whose value increases with age.
Whole life policies can function like savings accounts in the context of financial planning. If you’re not a disciplined saver, buying whole life can be a great strategy. Not every dollar you pay into your policy belongs to you, of course. Insurers keep some of the money, known as Cost of Insurance (COI), to defray the cost of your death benefit. The COI portion of your premium is fixed, though, and with every premium you pay, the non-COI portion adds value to your policy. Whole life policies earn tax-deferred interest and sometimes dividends. You can also cash your policy in or borrow against it. Whole life provides a safety net for you while protecting your beneficiaries.
Universal Life Insurance
Universal life is a subspecies of whole life but resembles term life insurance in some ways. It gains value over time and even gives you some flexibility. You can alter your premium payments and death benefit as your needs change; however, doing so can affect the cash value and reduce your policy's benefit. Universal life is generally less expensive than other types of whole life. If you maintain level premium payments, it can be a good deal. But as you age, the COI portion of your premium does go up. So your policy gains less value in your later years.
Our best advice is don’t try to figure life insurance out on your own. Consult an insurance agent—preferably one recommended by a friend—and look at multiple scenarios and quotes.