What You Need to Know About Life Insurance: A Complete Guide 

Life insurance is an important financial product that can provide financial security and peace of mind for your loved ones if you or your spouse pass away unexpectedly.  

With so many different types of life insurance available, it can be overwhelming to choose the right one for you. In this guide, we will provide an overview of the different types of life insurance available to help you make an informed decision. 

What is Life Insurance? 

Life insurance is a type of financial product that provides a lump sum payment to beneficiaries upon the death of the policyholder. It is designed to provide financial support to loved ones in the event of an unexpected death, helping them cover expenses such as funeral costs, outstanding debts, and living expenses.  

Life insurance policies fall under two categories: term life insurance and permanent life insurance. 

The amount of coverage and premiums paid depend on factors such as age, health, and lifestyle habits. Overall, life insurance offers peace of mind and security for both the policyholder and their loved ones. 

Term Life Insurance 

Term life insurance provides coverage for a specific period of time, typically ranging from 10 to 30 years. This type of insurance is ideal for those who will need coverage for specific period of time, such as parents with young children or individuals that still have a mortgage to cover.  

Term Life Insurance Pros 

There are several advantages to choosing term life insurance over other types of life insurance policies, including the following:  

• More affordable premiums. Term life insurance generally has more affordable premiums when compared to other types of life insurance. 
• Flexibility. Term life insurance policies offer flexibility in terms of the length of coverage and the amount of coverage needed. For example, you can typically choose to have money dispersed in 10, 20 or 30 year terms. This allows individuals to choose a policy that meets their specific needs and budget. 
• Simple and straightforward. Term life insurance policies are typically easy to understand and do not have complicated investment components like some permanent life insurance policies.  

• Convertibility. Some term life insurance policies offer the option to convert to a permanent life insurance policy at a later date, providing additional flexibility and long-term coverage options. 

Term Life Insurance Cons 

While there are advantages to term life insurance plans, there are also downsides to choosing term life insurance plan. Some of these disadvantages include the following:  

• Limited Coverage. Term life insurance only provides coverage for a specific period of time, typically 10, 20, or 30 years. Once the term ends, the policy expires and there is no payout unless the insured dies during the term. 
• No cash value. Unlike permanent life insurance policies, term life insurance does not accumulate cash value over time.  

• No flexibility. Once you purchase a term life insurance policy, you cannot change the coverage amount or length of the term. This lack of flexibility can be problematic if your financial situation changes or if you need coverage for a longer period of time. However, this also means that your premiums won’t go up unexpectedly. 
• May not cover pre-existing conditions. Depending on your health history, you may not be able to qualify for term life insurance or may have to pay higher premiums. Additionally, some policies may exclude coverage for certain pre-existing conditions. 
• Not an investment. Term life insurance is designed solely to provide a death benefit to your beneficiaries in the event of your untimely death. It does not have an investment component that can be used to build wealth over time like other life insurance policies. 

Permanent Life Insurance  

Permanent life insurance is a type of life insurance policy that provides coverage for the entire lifetime of the insured individual. Unlike term life insurance, which only covers a specific period of time, permanent life insurance offers lifelong protection and typically includes a savings component that accumulates cash value over time.  

This cash value can be used to pay premiums or borrowed against for various purposes.  

Permanent life insurance policies come in different forms, including whole life, universal life, and variable life, each with its own unique features and benefits.  

Whole Life Insurance 

Whole life insurance provides coverage for the duration of your life and includes a savings component that accumulates cash value over time.  

This type of insurance is more expensive than term life insurance but offers more comprehensive coverage and flexibility. The cash value component of whole life insurance can be used to pay premiums or borrowed against in times of need. 

Universal Life Insurance 

Universal life insurance is similar to whole life insurance but offers more flexibility in terms of premium payments and death benefit amounts. This type of insurance allows policyholders to adjust their premiums and death benefits as their needs change over time. Universal life insurance also includes a cash value component that accumulates interest over time. 

Variable Life Insurance 

Variable life insurance allows policyholders to invest their premiums in various investment options, such as stocks and bonds. The cash value of variable life insurance policies fluctuates based on the performance of the underlying investments. This type of insurance carries more risk than other types of life insurance but also has the potential for higher returns. 

Permanent Life Insurance Pros 

Permanent life insurance policies come with several advantages, including the following:  

• Provide lifelong coverage. Unlike term life insurance, which only provides coverage for a specific period of time, permanent life insurance offers coverage for the entirety of your life. 
• Builds cash value. Permanent life insurance policies have a savings component that accumulates cash value over time. This can be used as collateral for loans or withdrawn to supplement retirement income or to cover other costs. 
• Tax advantages. The cash value permanent life insurance policies grow tax-deferred, meaning you won’t owe taxes on the growth until you withdraw it. Additionally, death benefits are generally paid out tax-free to beneficiaries. 
• Estate planning benefits. Permanent life insurance can help cover estate taxes and provide an inheritance for loved ones. 

Permanent Life Insurance Cons 

While there are several reasons why consumers may choose a permanent life insurance policy, it’s also important to be aware of the drawbacks, including: 

• Higher premiums. Permanent life insurance policies typically have higher premiums than term life insurance policies. This is because they offer lifelong coverage and also include a savings component. 
• Complex policies. Permanent life insurance policies can be complex and difficult to understand. Since they often involve investment components, they may require ongoing management. 
• Limited flexibility. Once you purchase a permanent life insurance policy, it can be difficult to make changes or cancel the policy without incurring significant fees or losing some of the value built up in the policy. 

• Lower returns. While permanent life insurance policies do offer a savings component, the returns on these investments are often lower than what you could earn through other types of investments such as mutual funds.  

Conclusion 

Choosing the right type of life insurance can be a daunting task, but understanding the different options available can help you make an informed decision.  

Whether you need coverage for a specific period or want comprehensive coverage for the duration of your life, there is a life insurance policy that can meet your needs. 

Life Insurance FAQs 

What factors affect your life insurance premiums? 

When choosing a life insurance policy, it’s important to understand what factors may affect how much you will pay each month. The primary factors that can have an impact on your premiums are the type of insurance you’re seeking to obtain, your age, and your health, including pre-existing conditions.  

How much life insurance coverage do I need? 

The amount of life insurance coverage you need depends on your individual circumstances, such as your income, debts, and dependents. A general rule of thumb is to have coverage equal to 10 times your annual income. 

Can I change my life insurance policy after I purchase it? 

Yes, many life insurance companies allow policyholders to make changes to their coverage as their situation changes. However, depending on the changes you want to make, it may make sense to simply get a new policy. 

How We Rate Banks that Life Insurance Companies 

We identify life insurance companies. The life insurance companies are evaluated based on five factors that we believe are important for consumers: years in business, product types, customer service availability, financial strength, and Better Business Bureau (BBB) Ratings. Please find a full description of our ratings system here.

Disclosure: We do receive advertising compensation from some partners, which influences what companies appear on our site and where they appear. For additional details please click here. 

Last updated: 6/3/24