Take the mystery out of coverage and discover how different policies work.
Key takeaways:
- Term life, whole life, and child-centric policies are available.
- Factors to consider when choosing a policy include age, medical history, and required coverage.
- Life insurance provides a financial cushion for loved ones when the policyholder passes away so survivors can avoid dipping into savings to cover their debt and final expenses.
According to recent data from LIMRA, Americans are becoming increasingly aware of the need for life insurance, yet 40% of the middle-income class live with a significant life insurance gap (in other words, the amount they have won’t cover the amount they’ll need).
Why is this the case? Several factors are responsible. Some are underinformed on the true costs of life insurance, while others believe the price tag is simply too high. According to the LIMRA study, many young Americans mistakenly believe that life insurance costs three times what it actually does.
No matter where you stand in your life insurance journey, here’s what you need to know when considering a life insurance policy.
Life Insurance Explained
Life insurance is commonly purchased by those with spouses, long-term partners, or dependents. It provides a financial cushion for survivors when policyholders die, helping them meet current and future expenses.
Those without spouses, long-term partners, or children may feel their financial responsibilities are over when they pass away; no significant other, no dependents, and thus no need for life insurance to support anyone.
However, it’s equally important to consider potential financial burdens on extended family when single policyholders pass away.
Why Life Insurance Also Matters for Single People
Death doesn’t stop debt collectors, nor does it negate funeral and other end-of-life expenses. The average cost of a cremation in 2024 was $6,071, while the average burial cost was $7,848.
Combine this with the fact that the average American leaves behind over $61,000 in debt after they pass away, and it’s easy to imagine the crushing stress that those responsible for covering these expenses may feel.
A life insurance policy can relieve these stresses significantly. Additionally, some policies can help meet a single person’s medical expenses while they’re still alive should they be in an accident or become ill.
How to Choose a Life Insurance Policy
Life insurance coverage is tailored to the person who buys it. Some common considerations are:
- Your age;
- Your current and future health concerns;
- The price of premiums and when they’re scheduled; and
- How much coverage is needed.
With these fundamental factors in mind, let’s examine the different coverage types you may consider when choosing a life insurance policy.
Term Life Insurance
Term life insurance covers a certain period (5, 10, 15 years, etc.) and is typically more affordable than whole life insurance.
Term life insurance is generally better-suited for those on tighter budgets or looking to provide a financial cushion for loved ones during a specific life era, such as early childhood years or when your children attend college.
Some policies require only a few medical questions and no actual exam. Guaranteed issue policies, for example, let you skip medical exams but are generally more expensive.
Some forms of term life insurance also cost more in the long run, such as annual renewable options, which cover you for one year and increase in price with each ensuing year.
Another drawback is that term life only pays out if the policyholder dies within the covered period. Adults with children and dependents are usually better off with whole-life insurance to bypass this limitation.
Whole Life Insurance
Whole life insurance pays out at almost any time and provides continuous protection.
Some other advantages of whole-life insurance include:
- A tax-deferred cash value account that can be withdrawn from the policy or borrowed against;
- Tax-free death benefits when the payout is below the federal and state cap;
- Shortened billing periods with higher premiums; and
- Guaranteed Issue Policies.
Similar to term life, whole life insurance policies are not without their drawbacks.
Whole life often requires medical exams, which are unpopular among prospective policyholders. Some policy payouts are also restricted during the first few years of coverage: Passing away before that period ends could significantly reduce the death benefit.
Universal Life and Variable Life
Universal life allows for cash generation via an associated investment account, from which the policyholder can keep the tax-deferred interest.
The death benefit and premium amounts can be raised or lowered, and any cash value or loans taken out on the policy won’t impact future Social Security payments.
However, higher premiums, fees, commissions, and administrative expenses are significant drawbacks of universal life policies. There’s also no guarantee of a particular rate of return from the policy’s related investments.
Variable life insurance comprises a death benefit, a premium, and a cash value that can be invested. Variable coverage is therefore also linked to the market. It’s similar to a universal policy in the sense that it thrives when the market is doing well and vice versa.
Both types have high fees in common, with variable policies also being expensive due to:
- Withdrawal costs;
- Loan interest if the cash value is used as loan collateral; and
- Investment management fees.
Before committing to a policy, you should always consult with a life insurance expert for complete transparency into fee structures.
Life Insurance for Children
Life insurance for children is typically cheaper and easier to obtain than for adults and can be either whole or term. It can also be added as a rider on adult policies.
Whole life can be particularly helpful to the child in later life if reasonable rates are locked in early and the child continues the coverage into adulthood.
Child life insurance can also be seen as an investment and a cash source; two possibilities that should only be considered under professional advice since accessing any cash value may reduce the death benefit.
Remember that your own life insurance can help grow wealth across generations. Retaining wealth is key to its generation, and that’s what a life insurance policy can do. It can prevent expensive life events (planned or otherwise) from putting a serious dent in your family’s earnings and savings. Think of it as an emergency fund of sorts where payments are tax-free.
You may even consider setting up a trust or estate to provide for younger loved ones since insurers don’t pay out to minors. Using any ready cash from a life insurance policy could help start a nest egg for the children in your life.
Find the Right Life Insurance Policy for You With Help From NICRIS
If you’re overwhelmed by the options, we’re here to help.
NICRIS specializes in term life insurance coverage and helping our clients find insurance packages that provide the most peace of mind.
Take advantage of our free and personalized insurance review, send us a message, or get an instant quote!