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Term life insurance is usually your best option. This is because it’s typically the least expensive with the most coverage. Read on to learn more about the various types of life insurance, and why I believe term coverage is superior to all others.

Types of Life Insurance

Life insurance is one of those things you probably know you need, but it’s easy to put off.  No one wants to think about dying, and it can be overwhelming when someone is trying to sell to you.  How do you know what type of life insurance is best for your needs?

However, if anyone depends on your financial support—spouse, children, a disabled dependent or even elderly parents—you need it in place for their security.  

There are different types of life insurance, and I want to give you an overview before I explain which one is the best option.

Term life insurance is the least expensive and lasts for whatever duration you select in your contract.  Once that time is up, you stop paying the premiums and the benefit expires.  It could be short term (5 years because you have a debt you need to insure). Or you may need a 25 year policy to cover your young kids until they are able to support themselves.  

Whole life insurance has a cash value, and you can borrow against it.  You are paying higher premiums to an investment account with money you can access for loans.  In the event of your death, you receive the full amount of the policy, but the longer you live, you are paying into an account that will reach the full coverage value. You are investing deposit premiums to grow over time with a guaranteed payout.  

Universal life insurance is cheaper than whole life and may have variable payments.  It has little to no cash value, but a guaranteed payout after a certain number of years if you maintain payment.  However, if you miss even one payment, you may forfeit the entire account.

Universal comes in different flavors:  Indexed universal follows an index fund and gains are determined by that fund.  Variable universal links to the stock market, and requires more hands on management.  The fees are usually higher than a normal investment account, and growth may be capped according to the policy.

Why Term is The Best Choice

Term is the only life insurance you will ever need.  For a low cost, you can get a high coverage policy.  Whole and universal are poor investments for most people because you could better invest that money yourself for lower fees and less risk of default.  Yes, it’s important to invest money, but don’t tie it to your life insurance coverage.  

The fees, rules, and caps specific to the insurance industry make for a poor investment compared to what you can do with a Roth IRA.   Term coverage is an immediate safety net for a much lower cost.  For the same premiums, you can secure a much higher payout amount of term insurance as compared to what you would pay for whole life. 

You stand the risk of never receiving a payout (and hope you won’t).  But in the case of an emergency, term insurance can give your loved ones a large payout for the lowest investment.  Life has it’s ups and downs, and carrying an ongoing hefty insurance payment is a burden you don’t have to carry.  Especially with a policy that may dump you if you can’t cover it one month!  Even if you don’t need a lot of coverage—just enough to help your parents for a few years—you can get term insurance for reasonable rates.

How much coverage do I need?

How much insurance you need depends on your situation, and recommendations are usually based on a multiple of your annual salary.

For years I have referenced LifeHappens.org. They are an excellent resource, offering simple and thorough methods of life insurance calculation. Their tools take into account many factors that are very important. Remember, life insurance is about love – so take the extra steps and get this number right.

Consider the people you support. Are you the breadwinner for an entire family, or is it just you and a spouse who could also work should something happen to you?  A married couple with children probably needs life insurance for both spouses, even if only one works outside the home. Losing a stay-at-home parent may mean additional expenses for child care. A disabled dependent child may need monetary support long after the parents are gone.

How much does term life insurance cost?

The length of the policy, your age and risk factors will impact how much you pay.  More coverage will cost more (although still much less than you would pay with whole or universal life).  Any amount will be helpful, so start with a payment you are comfortable knowing you can always increase if you need to.  

Many employers offer a group life policy to cover their employees.  If that includes you, see what coverage you already have. Keep in mind, you may leave that job in which case you’ll need to replace that coverage. 

Many people assume whatever their company offers is enough coverage.  But company policies tend to be small, maybe your annual salary or a lump sum of $25,000.  This is not enough coverage for most people.  You have the option to increase that amount, but likely a private policy will be a better buy.  I think you’ll be pleasantly surprised at how affordable term life insurance can be when you get a quote.

The younger you start shopping insurance, the lower the premiums.  It’s worth looking into even if you are just starting a family and don’t feel like you need it immediately because you can lock in a low rate for the duration.  Usually term life policies are for between 10 and 30 years.  If you do start young, don’t skimp.  You’ll likely want more coverage as your family and your lifestyle grow.

How can I get term life insurance setup?

When you apply for life insurance, you will answer questions about your health and family history.  Next, you’ll set up time for a medical exam that usually involves a blood sample and blood pressure reading.  Your quoted rate will consider your tobacco use, the risk of your occupation and even your driving record.  

There are options available for simplified issue or guaranteed insurance that does not require an exam.  They will still send you a questionnaire.  While this process may be faster and easier, if you are a healthy adult, you will likely pay lower premiums with a more comprehensive exam.

If you choose a shorter term, keep in mind that though you may have the option to renew, your premiums will likely go up.  It may be in your best interest to choose a longer term to lock in lower premiums.  Once you find a policy you are comfortable with, you can have payments automatically deducted from your checking account so you don’t have to think about it every month. 

Non-payment of a term policy will also cause a lapse in coverage, but there is usually a grace period to reinstate your policy. Find out the details when you purchase your insurance. With a much lower payment for term life, the hope is that you will be able to continue payments even in lean times. Life insurance should not be thought of as just another payment, but an integral part of your financial plan.  Especially in lean times, it is important to have a fallback for your family.

Tammy Lally

I BELIEVE MONEY IS NOT YOUR WORTH. Tammy Lally is an author, speaker, and Certified Money Coach (CMC). She helps others master their finances by first conquering their emotions around money, then by creating a comprehensive financial plan. She brings decades of experience and endless love to her bulletproof process for money mastery. She is the author of the book Money Detox, and her TED talk on Money Shame has over 2 million views.

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