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Life insurance is a fundamental part of financial planning for most families. However, some families put off the buying decision, especially in a difficult economy.
When it’s all said and done, purchasing life insurance is an important financial decision that can protect your family in the face of the unexpected. Therefore, learning about the different types of life insurance policies and coverages is critical.
Life insurance comes in many flavors, and there is a policy to fit nearly everyone’s budget. But here’s the deal — we know you have plenty of life insurance questions.
Keep reading as we dig deeper into the most common forms of life insurance, exploring the pros and cons of each. You can also begin shopping for the best life insurance rates by comparing premiums across companies. Start now by plugging your ZIP code into our free insurance comparison tool.
What are the main types of life insurance?
You may already be asking yourself these questions: What is term life insurance? What is whole life insurance? And which is the best type of life insurance for me and my family?
We’re glad you asked.
After all, having a better understanding of what you need begins with just that — understanding. So let’s begin by taking a closer look at term life insurance.
Term Life Insurance Explained
Term life insurance is one of the types of life insurance most people look to for the lowest rates; it provides temporary coverage while a family has a mortgage, education or other expenses to pay off. While it is no-frills, a term life policy does provide the maximum death benefit for a minimum of cost. Experts with the Insurance Information Institute (III) refer to term life insurance as “the simplest form of life insurance.”
Here’s a quick video that explains what term life insurance is all about:
A few key features that apply to most term life insurance policies include:
Convertibility. For a term life insurance policy to offer convertibility means that you have the option to convert your temporary coverage into a permanent policy (we will talk more about permanent policies below). To be more specific, convertibility is usually offered into an individual whole life, individual universal, or annually renewable term policy.
Keep in mind that converting from term to whole insurance (or another form of life insurance) will result in higher premiums. Also, some insurers place age limits on conversions — in most case, not allowing you to convert after the age of 65.
Decreasing Death Benefit. This means that as your debts go down – such as your mortgage – so does the amount of coverage that you need. This doesn’t change the cost of your monthly premium. It does, however, keep it lower. Premiums stay level each year, although the face value reduces accordingly.
Sample Term Life Insurance Quotes
If you’re researching different types of life insurance, determining your potential monthly rates is no doubt at the top of your list. Below, we’ve created a chart where we’ve broken down the combined average monthly rates among the top ten insurers by market share. These rates are categorized by gender, and assume that the insured is a healthy non-smoker.
Average Term Life Insurance Rates for Males and Females| Age | $100,000: Male | $100,000: Female | $250,000: Male | $250,000: Female | $500,000: Male | $500,000: Female |
|---|---|---|---|---|---|---|
| 25 | $11.03 | $10.02 | $22.10 | $12.91 | $23.19 | $19.04 |
| 30 | $11.12 | $10.07 | $15.31 | $13.02 | $23.85 | $19.26 |
| 35 | $11.12 | $10.07 | $15.42 | $13.02 | $24.07 | $19.26 |
| 40 | $12.65 | $11.12 | $17.94 | $15.21 | $29.10 | $23.63 |
| 45 | $14.57 | $13.31 | $21.55 | $19.69 | $36.32 | $32.60 |
| 50 | $18.60 | $17.20 | $30.19 | $27.02 | $53.60 | $47.26 |
| 55 | $24.51 | $20.61 | $42.88 | $34.35 | $78.98 | $61.91 |
| 60 | $35.88 | $27.48 | $71.10 | $50.86 | $135.41 | $94.94 |
| 65 | $51.06 | $37.76 | $109.82 | $75.14 | $212.85 | $143.51 |
These numbers clearly demonstrates the benefit of securing term life insurance early on in life. A $100,000 policy for men and women can cost anywhere from $11 to $12 a month for those in their twenties and thirties. As the customer gets older, so do the monthly rates — as high as $212.85 a month for men over 65.
It’s also noteworthy that men are paying consistently higher rates across the board. In fact, the rates are significantly higher with older men insured at $500,000.
Riders and Other Term Life Insurance Features
A rider facility is also available where policyholders have the option of adding a rider. Some riders serve to convert term insurance into a whole life insurance policy in the event of the policyholder’s death, to provide ongoing protection for the remaining spouse and children.
We’ve compiled a list of some of the most common riders for term life insurance:
Common Term Life Insurance Riders| Rider | Description |
|---|---|
| Accidental death benefit | Pays a benefit in addition to the death benefit of the policy if the insured dies as a result of qualifying accidental injuries |
| Terminal illness | Gives early access to a percentage of the death benefit if diagnosed by a physician as having 12 months or fewer to live |
| Child | Pays a death benefit to the insured parent upon the death of an eligible child |
| Spouse | Pays a death benefit to the insured person upon the death of an eligible spouse |
| Waiver of premium | Waives the policy premiums if the insured becomes completely disabled |
| Disability income | Pays a monthly income of 1 – 2% of the face value if the insured becomes disabled |
| Guaranteed insurability | Guarantees you the right to buy additional insurance, without proof of good health, at specified dates in the future |
| Return of premium | The insurer will return your premiums at the end of the term, minus the additional cost of the rider |
| Term conversion | Allows you to convert term life insurance into whole life insurance without undergoing a medical exam |
As you can see, riders you can add to your policy include accidental death benefit, terminal illness, and disability income. And as we’re sure you’ve already guessed, riders comes with an additional premium charge. Be aware that not every insurer offers the same types of riders.
Finally, it’s important to understand just how much life insurance you need. Take time to carefully weigh out the numbers, which can include everything from funeral costs to everyday living expenses.
Permanent Life Insurance Explained
Permanent life insurance is a type of coverage that provides insurance for the life of the policyholder with a payout guaranteed upon the death of the insured. Something else that really differentiates this type of life insurance from term is a “cash value” component, which we’ll go into further below.
Permanent life insurance products include whole life, universal life, variable life and combination life. We’ll explain each of these products soon. But first, let’s talk monthly premiums.
Sample Whole Life Insurance Quotes
When it comes to permanent life insurance, premiums are a big distinguishing factor. Right now, we want to break down some sample quotes. First, we’ll begin with a chart showing the average, monthly whole life insurance rates for a female with $100,000 in coverage:
Average Monthly Whole Life Insurance Rates for Females ($100,000 Coverage)| Companies | 50-Year Rates | 55-Year Rates | 60-Year Rates | 65-Year Rates |
|---|---|---|---|---|
| Foresters Financial | $13.13 | $17.41 | $25.46 | $34.39 |
| MassMutual | $14.62 | $20.28 | $28.19 | $42.64 |
| AIG | $15.04 | $20.96 | $25.58 | $44.93 |
| AAA | $15.40 | $18.83 | $25.61 | $37.93 |
| Assurity | $16.53 | $22.97 | $32.71 | $49.76 |
| Mutual of Omaha | $16.73 | $21.97 | $29.20 | $46.57 |
| TransAmerica | $17.46 | $25.89 | $36.98 | $59.94 |
| Prudential | $21.27 | $23.80 | $29.49 | $41.13 |
| State Farm | $23.49 | $29.67 | $40.98 | $59.51 |
| Liberty Mutual | $32.94 | $39.15 | $59.76 | $81.27 |
Now, for a look at average monthly whole life insurance rates for a male with $100,000 in coverage:
Average Monthly Whole Life Insurance Rates for Males ($100,000 Coverage)| Companies | 50-Year Rates | 55-Year Rates | 60-Year Rates | 65-Year Rates |
|---|---|---|---|---|
| Foresters Financial | $15.31 | $20.83 | $34.04 | $43.66 |
| MassMutual | $16.97 | $24.10 | $35.50 | $61.68 |
| AIG | $17.01 | $26.62 | $38.22 | $55.07 |
| AAA | $17.78 | $22.53 | $37.14 | $59.93 |
| Mutual of Omaha | $18.88 | $27.65 | $41.67 | $59.73 |
| Assurity | $20.10 | $28.45 | $44.20 | $67.08 |
| TransAmerica | $20.21 | $30.10 | $42.66 | $71.29 |
| Prudential | $21.88 | $28.18 | $37.72 | $58.45 |
| State Farm | $26.54 | $34.45 | $51.50 | $83.09 |
| Liberty Mutual | $40.32 | $55.35 | $95.58 | $141.93 |
What should be obvious is scrolling through these rates is that they are, as a whole, higher than what those with term life insurance tend to pay in monthly premiums for $100,000 in coverage. It should also be obvious that as the insured gets older, so does the cost. For men, 65-year rates can run as high as $141.93 a month for $100,000 in coverage.
In terms of which insurers have the lowest rates, we see some of the best numbers with Foresters Financial. On the flip side, Liberty Mutual Life Insurance has some of the highest monthly rates at this coverage level for both men and women.
Now that you have a better understanding of the numbers behind this type of life insurance, let’s talk more about what falls under the umbrella of permanent life insurance.
Cash Value Life Insurance Explained
In short, cash value life insurance is a form of permanent life insurance that includes the ability to invest. How does this work? A portion of what you’re paying in premiums funds the cash value portion of the account. This portion ultimately grows over time.
What’s key to know about cash value accounts is that the money is available to policyholders while they are living. So, if you had an emergency and wanted to withdraw or borrow against the cash value, you could.
Be forewarned that it takes many years to build up significant cash value. Therefore, it may not be for everyone.
Now that we’ve given you more insight into cash value, let’s look into some of the most common types of permanent life insurance: whole, universal, and variable.
Whole Life Insurance
With whole life insurance, sometimes called ordinary life insurance, the cash value grows in fixed-income investments on a tax-deferred basis. You can view this video for a quick overview of what whole life insurance entails:
Whole life insurance is the most common life insurance product. And as long as premiums are paid, the policy stays in force. The policy pays an annual dividend, which may vary based on the company’s performance and mortality statistics for the year.
Universal (or Adjustable) Life Insurance
Universal or adjustable life insurance provides flexibility, allowing individuals to adjust policy premiums and the death benefit when changes in estate tax laws, a financial situation or any other circumstance trigger a need. Interest payments on the cash value vary based on the insurer’s business performance and will not go below the published minimum rate.
Variable Life Insurance
With variable life, the cash value and death benefits grow and fluctuate based on investments in mutual fund-type investments, which provide a variable rate of return, although there is no guarantee of a return on the cash value. Sub-accounts are created which simulate mutual funds, giving dozens of investment options to allow the policy’s cash value to grow. As with other permanent life policies, the annual growth of the cash value is not subject to taxes.
This video sheds more light on variable life insurance policies, and if they are worth considering:
When it’s all said and done, it’ll be important to ask yourself if you should buy variable life insurance, or any other form of life insurance. Examine your pros and cons, and be sure to ask plenty of questions.
Here’s something else to keep in mind: some insurers offer a combination life insurance policy, which puts whole life and term insurance together. This allows the policyholder to have a basic whole life policy, with additional term insurance to increase the death benefit for a set period of time, while keeping premiums lower, and allowing the individual to build some cash value in a whole life policy.
Which is better: term or whole life insurance?
All types of life insurance have different advantages and disadvantages. Financial situations, long term goals, and lifestyle all play a role in determining which type of life insurance is right for one’s family.
Pros and Cons of Term Life Insurance
Consider the pros of term life insurance. When an individual only needs life insurance for a certain period, paying for the limited coverage of term life is ideal. Usually, term life is used to protect against losing the income of a household provider in the event of a premature death, which would leave the family in a difficult financial position. In many cases, this risk only exists until the children are self-sufficient and the parents retire.
Term life does not carry any additional charges or extra features, which allows the policyholder to get the largest death benefit for each dollar invested in the policy. Term life insurance has very low upfront premiums, which work well for those looking for temporary insurance coverage only.
One of the cons of term life insurance is that individuals have a difficult time knowing how long they will need it. A person could plan on carrying the insurance for 20 years, only to find he needs more years of insurance coverage later. Couples who have a child after buying term insurance, may not have planned to be paying college tuition in their 60s; this would require more term insurance, and the costs would be the same or more than permanent insurance for his age group.
Additionally, if a policyholder has a term life policy that expires or has a non-guaranteed renewal, and has developed health problems, his insurance premiums can increase dramatically.
Pros and Cons of Whole Life Insurance
There are several pros to consider when considering the purchase of permanent, or whole, life insurance. In most cases, the premiums are fixed which gives the insured a certain level of predictability financially. As long as the policy premiums are kept up-to-date, the death benefit is guaranteed to pay out to beneficiaries regardless of when the insured dies.
A whole life policy may build cash value on a tax-deferred basis, and if the policy is surrendered at any point, any cash value is returned to the policyholder.
If the policyholder stops making payments, he can either take the cash value as is, or use it to buy a paid up insurance policy or extended term insurance coverage. The insurance company must make at least one of the other insurance options available for him.
Whole life insurance is not without its disadvantages. The product is more complex and harder to understand than term life insurance. It also has higher premiums than term life in earlier years, and if coverage lapses early, it could become costly due to costs and fees that do not get refunded to the customer.
Types of Life Insurance: A Final Word
It’s clear: there are many types of life insurance options available for you and your family. What coverage they provide, and how much they cost, largely depends on what you feel you need.
Bottom line? It will always be of worth to do your homework, and seek out what coverages are available across different life insurance companies. Beginning your journey of comparing rates and coverages is easy. Start now by entering your ZIP code into our free insurance comparison tool now.
