Unfortunately, life insurance is something many people – especially women, who are chronically underinsured – avoid thinking about for as long as possible. Others don’t prioritize it because they’re not sure if they need it. In reality, the question of whether or not you need life insurance is an easy one to answer. Ask yourself: Would anyone suffer financially if you weren’t around to provide for them? This could be a child, a dependent parent, a spouse, or even a business partner.
If your answer is yes, then it’s time to consider buying some type of life insurance, which would provide your beneficiaries with funds (known as a “death benefit”) if you were to die. Your death benefit could help replace your income, cover funeral costs, pay off debt, or fund college for your kids, among other things. Simply put: Life insurance is a smart, often cost-efficient way to make sure others are taken care of if something were to happen to you. Here’s a guide to help you figure out which type of insurance makes the most sense for your needs.
Term life insurance provides a death benefit for a specific period of time called the term. When that period is over the coverage terminates. Term is a pure insurance policy with no investment component attached, which is why it’s usually the most inexpensive form of life insurance. The cost varies based on the size of the death benefit, your health and your age. As you get older (and are more likely to die) the cost of a term policy goes up. That’s one reason many people opt for “level term” policies, which hold your premiums steady for up to 20 or 30 years — another reason is that with these longer-term policies you don’t have to go through an underwriting physical to qualify each time you renew. The other option would be “renewable term” policies, where your premiums can go up every year. But those can require new physicals, and if your health is declining, you could be looking at a much bigger bill.
Term life insurance is the right insurance for most people — because it’s the best way to get the most amount of coverage for the least amount of money. For many people, it’s the only way to afford the total coverage you ideally need. It also works well for anyone who needs coverage for a limited amount of time. For example, you might need coverage until your child graduates from college or until your mortgage is paid off. If you die during the term of your policy, your designated beneficiary will collect the death benefit. If not, your policy will end once the term is over. (Note: It’s always a good idea to make sure your term is “convertible” to permanent insurance. It won’t be free, but if you do need the coverage for a longer period of time, you know you’ll be able to qualify for it even if your health has declined.)
Many of us have some group term life insurance coverage available through our employers, and in many cases we might not even realize it. Check with your HR department to understand what’s available to you. Buying a policy through your employer may offer a less expensive way to buy more, because group life insurance policies — like group health insurance policies — spread out the risk the insurer is taking over a larger group of people. The downside is that when you leave your job you’ll lose the coverage unless you can arrange with your employer to continue it by paying out of pocket (not all employer policies are “portable” in this way, but some are, so ask.)
Accidental death and dismemberment insurance (also known as AD&D) is another common form of employer-sponsored life insurance. And while this can be a great safety net to have, it won’t pay out a death benefit if you pass away from illness or other non-accidental causes. If this is all your employer offers, shop for additional insurance on your own.
Permanent life insurance provides coverage for as long as you live providing the premiums are paid. Besides including a death benefit, permanent insurance has an investment component that enables you to accumulate cash value.
How does that work? A portion of your premium goes toward building a cash account which can then grow tax-deferred from policy dividends, interest or investment earnings. And depending on the policy, you can borrow against it, or withdraw cash value. But because it’s doing double duty by providing an investment vehicle and a death benefit, permanent insurance typically costs more than term. Often much more. Also, any loans or withdrawals that aren’t paid back into the policy can reduce the death benefit, possibly leaving your loved ones with less.
Ultimately, to determine if permanent life insurance is right for you, you’ll need to ask yourself a couple of questions. First, what can you afford? If buying term is the only way to get enough insurance to provide for the needs of your dependents, then term is the way to go — or at least the way to start. Again, you can often add some permanent insurance down the road by converting term life into permanent.
Second, do you see yourself needing life insurance when you are 70, 80 or older? If your kids are self-sufficient and your spouse will be fine living on a combination of savings, investments and Social Security, then you may not need permanent insurance. But if you have a special needs child who will require your support well into adulthood, at least some permanent insurance is often a smart move. It can also be worth considering if you want to have enough insurance to cover estate taxes when you die.
There are three major types: whole, variable and universal. Here’s a rundown on each.
If you’re thinking about permanent life insurance as a way to build cash reserves, weigh the risks and costs with the potential for growth. You should also talk with a professional who can explain the return you can expect to see before you buy. And if you don’t understand exactly what you’re looking at? Keep asking questions until you do.