Common types of life insurance: What you need to know

Life insurance is part of good financial planning. Your coverage should match your circumstances. / Credit: Getty Images

Roughly half of Americans had life insurance in 2021, according to a report from industry association group LIMRA. If you’re not one of them, you might be wondering if you should watch it. But what is life insurance and who benefits?

In exchange for regular payments made over time to an insurance company or through an employer, the people you designate as beneficiaries receive an agreed amount when you die through your life insurance policy.

Experts recommend that most people carry life insurance as part of overall prudent financial planning. Life insurance helps protect spouses, children, family members and others who depend on your income. It can also be part of a legacy or philanthropic gift.

If you don’t have life insurance or want to increase what you already have, now is a good time to start. You can get started with a price estimate today.

“Most people don’t expect to die suddenly. And it’s usually an inexpensive way to make sure your loved ones are taken care of,” says Jarrod Sandra, owner of Chisholm Wealth Management in Crowley, Texas, and a certified financial planner ( CFP). . Life insurance is one of the main things Sandra said she considers as part of comprehensive planning for clients.

Who Should Get Life Insurance?

Just as health insurance is an important part of health care, and auto insurance is necessary to drive a car, life insurance can be an essential part of your financial picture. “Married couples, anyone with a dependent and business owner” should seriously consider life insurance, said Martin A. Scott, a CFP and founder of Principles of Permanent Wealth in Freehold, New Jersey, which specializes in in counseling people in their 30s and 40s. .

How do I get life insurance?

You can buy life insurance individually or in a group. Insurance companies offer policies to individuals. Employers and groups, such as professional associations, also offer group policies as part of a benefits package. Insurance companies are regulated by states. The National Association of Insurance Commissioners has a directory of licensed agents and companies. Many states also provide detailed descriptions of life insurance ins and outs on their websites.

You can also buy policies online. It is prudent to shop around. Most experts recommend that you consult a financial advisor with a fee-only CFP who is also a fiduciary. Kevin Lao, a CFP and founder of Imagine Financial Security in Jacksonville and St. Louis. Augustine, Florida, advises clients to also speak with a Chartered Life Underwriter (CLU).

“I recommend talking to a financial planner and an insurance broker together,” says Lao. “That way the recommendations are coordinated and there’s a lot of focus on that.”

If you are looking for life insurance, there are many options to choose from based on your needs and personal circumstances.

How much life insurance do I need?

Carefully consider how much life insurance you may need. You don’t want to pay a monthly premium that’s too high for your current financial situation, or too low for the payment you determine your beneficiaries may need after you’re gone. Then consider dependents like children, marital status and your current debts, experts say. Consider what they need and for how long, taking into account your lost income. You may also want to leave a bequest to someone for future expenses.

Typically, beneficiaries collect life insurance payments tax-free. Lao recommends using an insurance calculator to figure out your needs and generally advises people to consider coverage rated at least 10 times your gross income. It all depends on your situation.

What are the different types of life insurance?

There are two main types of life insurance, offered in different forms:

Permanent: This covers the entire lifetime (premiums may cost more). Term: This covers a specified period of years until the policy expires.

Here are popular versions of permanent and term life insurance:

Whole: Whole life insurance is a common type of cash value policy and often the simplest type of permanent insurance. Premiums are generally paid for life. If you take out a policy at an earlier age, for example in your 20s, you pay a lower premium than later in life because you are paying money into the policy for longer. The cash value of the policy increases based on a fixed rate set by the company.

The pros:

Effective for life (as long as you pay on time and don’t cash out on the policy) Some policies pay a dividend each year (although usually not guaranteed) You can build cash value and may be able to borrow from policy (premiums are locked for life)


Usually more expensive than term life Premiums can increase as you age, so experts advise starting early If you need more cover later in life, it can be expensive

Term: Term life insurance covers a set number of years. This can be useful during certain times in your life, such as when you are starting a family. But you have to renew long-term life policies, and premiums often go up.

The pros:

Less expensive than whole. Pay for what you need. Good for a certain period of time (if you raise a family, for example)


Only covers a certain number of years on the policy Every time you renew premiums usually go up If you get sick or have a high-risk medical condition, you may not be able to renew

Universal: Universal life is a type of cash value policy with flexible premiums that can be changed over time. It deals separately with the three main parts of the policy: premium, death benefit and cash value.

The pros:

More flexibility Death benefits can be adjusted or increased over time Can change premium and benefit value Policy can be paid out early


If you pay less than the premium, benefits can lapse Easy to lose track and not build on cash value If value reaches zero, policy can lapse Can include “mortality” and expenses that increase with age

Other types of life insurance

Variable: Benefit and cash value can vary, as the name implies. Insurance companies invest your contributions in areas such as stocks, bonds and other investments, much like a mutual fund. As the policyholder, you assume that risk. If the investments prosper, you get a higher return. If they fall, your premium may go up, reducing the value of your policy. Supplementary: This is what it sounds like: coverage on top of your primary policy. This could include insurance for your spouse, child or accidental death cover. Joint: This usually expensive option covers two or more people with the payout coming when the first person dies. Insurers see joint policies as riskier because a larger benefit payout is likely to be faster and larger overall.

In the end, your decision may depend more on who is relying on you financially and other circumstances, said Curtis J. Crossland, a CFP and managing member at Suttle Crossland Wealth Advisors in Scottsdale, Arizona.

“Are you starting a family or wanting to protect or provide for a significant other? Income replacement concerns, debt concerns, concerns about unmet future expenses, etc. All of these come into play in the right circumstances,” said Crossland. “If you’re a self-proclaimed single for life, then dying with a bunch of debt or not building a full retirement account won’t have the same impact on others.”

Have more questions about which life insurance policy is right for you? You can get started by getting a quote now.

Leave a Comment

Your email address will not be published. Required fields are marked *