As you begin to consider life insurance policies, you may realize that different options have profoundly different price tags. So what’s the difference? Is the group policy offered through your employer at no cost the same as the individual policy you were quoted at $35 a month? What’s all this talk about life insurance costs being on-par with a few lattes? And is it really true you can buy life insurance online, and if so, how does an agent factor into the mix?
All of these questions stem from differences between types of policies and different features in what’s offered from one policy to another. When shopping for life insurance, you’ll come across several different types of coverage. Some are simple to manage and more budget-friendly, while others offer lifetime coverage and a cash value component.
The right kind of life insurance policy for you will depend on a combination of factors. We’ll explain them here.
Types of life insurance
As you research life insurance, you may come across many different options. Here are the most common options.
Term life insurance
Term life insurance is one of the simplest and most affordable types of life insurance. It is characterized by its set lengths of coverage called a “term,” which typically comes in 10, 15, 20 or 30-year options. Most people choose a term length that’ll protect their loved ones until they are no longer financially dependent — for example, until the mortgage is paid off or the kids are out of college. If you die during the term of the policy, your beneficiary gets the payout, known as a death benefit.
Affordable premiums make term life insurance an attractive option. For example, a 30-year-old man in excellent health could get a 30-year, $500,000 Haven Term policy issued by MassMutual for as little as $36.26 per month. Term life insurance policies with level premium locks in your rate, meaning you will pay the same premium for the entire length of your term. There are also other forms of term life insurance that don’t have level premiums.
Whole life insurance
Permanent life insurance offers lifetime coverage. Whole life insurance, a common form of permanent life insurance, will stay in force as long as you pay premiums. Whole life insurance has a cash value component that can grow over time and you can borrow against that cash value. It’s important to note that taking a loan from the policy reduces the policy’s cash value and death benefit, can increase the chance the policy will lapse, and can result in a tax liability if the policy ends before the death of the person insured. If you pay your premiums your whole life, your death benefit is guaranteed to beneficiaries, no matter when you die, unlike term.
Permanent policies are significantly more expensive than term policies, which can be a deterrent for many cost-conscious families. A 30-year-old in excellent health might pay as much as 10 times that amount, based on Haven Life research.
Employer-provided life insurance
If you have employer-provided life insurance, do you need an additional policy? Typically, the answer is yes. That’s because employer-provided insurance only lasts for the length of your employment. If you move to a job that doesn’t offer employer-provided insurance and wanted to buy your own policy, you’ll only be older than you are right now, which could mean higher premiums. In addition, while the life insurance rule of thumb is to opt for coverage that’s between five and 10 times your current salary, employer-provided insurance is likely to be much lower (one to two times your salary). You should still consider opting into employer-provided insurance if it is offered to you, especially if it’s free, since if the worst were to happen, your beneficiaries would get the death benefit from both policies.
Questions to ask when considering a policy
As you research different insurance options, these questions may help you narrow in on the best life insurance option for you.
What’s my budget for life insurance?
The affordability of term life insurance can be a huge draw for many. If you have enough money to comfortably make the higher monthly payment for permanent life insurance and the cash value component appeals to you, then you may want permanent life insurance. If your budget is tight, term life insurance may be a good choice for you. How long do I need my life insurance to last?
How long you need your life insurance to last depends on your finances now — and your finances in the future. Term life insurance can provide for the unexpected. If you were to die, your beneficiary could potentially use the death benefit of the policy to help pay for funeral expenses, mortgage payments, outstanding debts, or education expenses. After the term expires, if you are in the position that your mortgage is paid off, 529 plans are funded, and a nest egg is saved up, life insurance may no longer be needed as an important financial cushion the way it was when you were younger.
Am I comfortable with complexity?
Term life insurance can feel simple — you pay the same premium monthly for a fixed period of time. The cash value component of permanent life insurance is more financially complicated.
There’s also the convenience factor with Term life insurance that can be purchased online. Permanent life insurance often requires an agent to facilitate the purchase, which can prolong the process.
Again, no answer is right for everyone, but knowing exactly what you’re getting and what you need can help you make the right decision.
How does life insurance fit into my overall financial plan?
Life insurance is a key element in an overall financial plan. Both term life insurance and permanent life insurance meet the need for a death benefit. The decision to purchase permanent life insurance should be based on the need for a death benefit and long-term financial goals.
Choose the life insurance option that works for you
While permanent life insurance and term life insurance are very different, and are chosen for different reasons, they have one major commonality: Premiums may be less expensive if a policy is purchased when you’re young and healthy. That’s why it may make sense to consider choosing a policy sooner rather than later. A financial professional may be able to help you decide which option makes the most sense for you.
Life insurance can provide tremendous peace of mind, a feeling that doesn’t have a price tag attached to it.
Anna Davies is a writer, editor and content strategist living in Jersey City, NJ. She has written for New York, Glamour, Elle, Men’s Health and others and has written 13 young adult novels under various names. Her favorite things to spend money on are discount theater tickets, oversize sweaters and cold brew lattes. Opinions are her own.