The Basic Types of Life Insurance and The Best Time to Buy Them

ByTop10.com StaffNov.11, 2018

This site is a free online resource that strives to offer helpful content and comparison features to its visitors. Please be advised that the operator of this site accepts advertising compensation from companies that appear on the site, and such compensation impacts the location and order in which the companies (and/or their products) are presented, and in some cases may also impact the rating that is assigned to them. To the extent that ratings appear on this site, such rating is determined by our subjective opinion and based on a methodology that aggregates our analysis of brand market share and reputation, each brand's conversion rates, compensation paid to us and general consumer interest. Company listings on this page DO NOT imply endorsement. Except as expressly set forth in our Terms of Use, all representations and warranties regarding the information presented on this page are disclaimed. The information, including pricing, which appears on this site is subject to change at any time.

Put your family's mind at rest by making sure you get suitable life insurance
Know you should probably be thinking about getting life insurance but don’t know where to start? Make sure you know what options you have available and which work best for your specific circumstances.

When searching for the best life insurance providers, one of the best ways to determine the most suitable policy is to consider your current age, health status and income. This will help narrow down your choices and simplify what can at times be an overwhelming number of options, especially when the underwriting and application process for life insurance can be lengthy.

Individual vs Employer Plans

When deciding whether to use the coverage that an employer offers or not, look at the rates of that plan versus what can be obtained with an individual policy. Often, younger employees can go with an option outside their workplace and take advantage of lower rates for decades, while for an older employee the company plan may be the most cost effective. However, it's strongly recommended to shop around for the best rates, because employer plans are often not the ideal options for those seeking more affordable solutions.

On the other hand, employer plans also might give a less healthy employee the chance to receive the same coverage as their peers at the same premium. They might also be able to add spouses and family members easily, and without additional medical checkups, meaning that if starting a family is on the horizon, going with an employer plan could be a boon.

Some issues that may arise include the possibility of losing coverage alongside the job, not being offered enough coverage for oneself or a spouse, or not receiving the best possible rate. The best path to take toward coverage depends entirely on the individual’s circumstances alongside the quality and types of plans offered by their employer.

Term Life Insurance

  • What is term life insurance?

Term life insurance charges a fixed monthly premium over the life of the policy, for a fixed death benefit should the policyholder die during the term. It is not meant to cover someone until they die but rather provides protection against sudden income loss or ongoing debt, like a mortgage, in increments of 5 to 10 years. Usually providers offer terms of 5, 10, 15, 20 or sometimes as much as 30 years.

The “set it and forget it” system of fixed premiums and fixed death benefit make it ideal to budget with, providing an efficient safety net for a relatively small amount each month.

  • When is the best time to buy term life insurance?

The best time to buy term life insurance is generally when the individual seeking a policy is young, and needs real coverage for the first time in their life. This kind of policy is inexpensive for young singles or couples because providers entertain smaller odds that the policyholder will pass on before their time, and accordingly offer term life plans to a maximum age – usually to about age 50. It is possible to get term life after this age with some providers, but the premiums will likely be higher. 

Young couples who have financial obligations like a mortgage are well-suited for term life insurance.  The smaller premiums are easy to budget and the death benefit can be matched to the amount remaining on the mortgage, adequately covering these kinds of large debts should the policyholder die. Someone in the early stages of their career may also expect their salary and coverage needs to grow in a short span of time, and for these individuals, renewable term life plans can be readjusted yearly without breaking coverage. 

Return of premiums riders allow those who outlive their term to receive their premiums back when the policy expires, but pay additionally each month for the privilege. Additionally, there are riders that can go along with term plans that allow the owner to convert to a whole life policy when they feel it is necessary – sometimes even without a medical exam.

Term life insurance is not suited for those who seek more flexible financial bonuses with their life insurance policy. Generally, term life plans award only death benefits and do not accrue money or otherwise allow policyholders to take advantage of the policy’s cash value.

Whole Life Insurance

  • What is whole life insurance?

Whole life insurance is different from term life in that it covers the policyholder for their entire life, pays out to a specified beneficiary when the policyholder dies, and accrues extra cash value over time. Premiums for whole life plans are fixed, are based on the age of the applicant at the time the policy is opened, and are usually higher than term life premiums due to policyholder coverage for a longer period of time.

The advantages that come along with whole life insurance are well-suited to the needs someone may experience over a long life. A primary feature of whole life policies is the ability to benefit financially. Many established providers pay dividends that are a nice yearly bonus based on performance, and policyholders can employ the cash value of their policy in several ways that help them deal with financial or medical needs that may arise.

  • When is the best time to buy whole life insurance?

Typically, once you start a family and add dependents, it is a good time to consider either buying whole life insurance or converting a term policy to a whole life policy. This could reasonably occur at age 30 or beyond. While term life is beneficial for covering debt for a set period of time, nothing can compare with the peace of mind gained through lifetime coverage.

Besides the financial advantages already covered, the ability to receive death benefits early if the policyholder is ill or injured, receive ongoing medical care coverage, and easily add children and spouses make whole life plans ideal for maturing individuals who want a level premium to plan around.

Take some time to weigh up your options before taking out a life insurance policy

Universal Life Insurance

  • What is universal life insurance?

While whole life insurance covers the policyholder for their entire life, universal life does the same but with different financial incentives. Whole life policies offer a level rate and steady cash value gain while universal life gives the ability to flexibly adjust the premium and death benefit balance, invest premiums along with the policy’s cash value, and save money in a variety of unique ways.

Premiums can be adjusted upwards to increase the death benefit at will, and can also exceed the minimum amount to add to the cash value of the policy in an intentional manner. If the premiums are covered every month, either through payment or by returns on smart investments, the policy stays in effect and keeps growing.

The biggest benefit comes by way of allowing policyholders to use this cash value.  The uses may include borrowing funds with the policy as collateral, withdrawing cash, paying for medical treatment, specifically stipulating how death benefits are paid to beneficiaries, and the ability to pay ongoing premiums with returns.

  • When is the best time to buy universal life insurance?

Generally, young and middle-aged families looking at maturing intelligently are the most appropriate customers.  While this is also true for whole life policyholders, the risk appetite and investing horizon for universal life customers is what matters. Those without other significant investments like universal policies compared to whole life policies because of their flexibility and potential.

This might be a particularly attractive strategy for younger people seeking out universal policies since they have usually not had a very long investing track record. Many universal life policies allow policyholders to invest their premiums and excess cash value as they see fit. Young couples without other investments are well-served by the ability to flexibly add to their premiums considering the prospect of earning higher returns.

Supplemental Life Insurance

Supplemental life insurance includes plans that can be stacked with other traditional solutions like term, whole or universal life policies. They are for a specific purpose, like protecting the timely and full payment of a mortgage should the main household earner suddenly pass. The usefulness of each type of supplementary plan depends on the age and specific needs of the policyholder alongside his or her unique demands.

  • Mortgage Protection

For the special purpose of ensuring that a mortgage gets paid, even without an active income, this type of supplementary policy can be added to term or whole life plans by many providers. The coverage available with these policies usually comes at higher values due to the high cost of homes, and can be matched to the exact value of an individual’s mortgage, so that if they should die, the death benefit given to their beneficiary will cover all the remaining payments.

These policies are best for those individuals who have a large amount of long-term debt on their balance sheets.  A perfect example would be a young couple beginning their lives together by making a down payment on a home and taking on a mortgage for their dream house.

  • Dental, Vision and Other Supplemental Coverage

Employer-provided health care plans often come with extra coverage for dental and vision, which offer inexpensive coverage for these kinds of health issues. Yearly checkups, changing prescriptions, emergencies and more are often taken care of at the employer’s expense. However, these kinds of plans are not available with individual life insurance policies, and are covered under health care policies instead.

If offered these benefits under an employer’s plan, there are rarely circumstances where taking advantage of them is not recommended. 

  • Accidental Death and Accidents

If death occurs on public transit or other circumstances that are out of the control of the policyholder and unrelated to health conditions, the policy pays extra death benefits to a beneficiary.

Accidents while doing intentionally risky activities are not covered, and neither are people who have inherently risky occupations. Dismemberment and other permanent loss of normal hearing or vision is covered as well, but it is rare that accidental death policies pay out. It is common to hear that either the accident was not covered by the policy or the policyholder had already let premiums run out before the accident occurred.

Accidents cannot be planned, and therefore there is no age that is best for this type of policy.

  • Guaranteed Coverage

Excellent for seniors, guaranteed coverage is a kind of supplemental insurance package that provides no-questions-asked coverage. The total coverage allowed is relatively low and premiums generally high, making this a great solution for dealing with ongoing medical care expenses and extra hospitalization costs.

Those without an accelerated care benefits rider on their whole life plan are ideal for this life insurance product, because if they fall ill, the costs of care will be covered. Otherwise, a family may have to go into debt to cover medical expenses and then end up paying this bill plus interest when the death benefit arrives.

Bottom Line

Before purchasing any single life insurance policy, take stock of current circumstances and consider any unforeseen needs that may arise. With so many different options available, it's important to review the best life insurance providers and consider your specific circumstances to choose a policy that will give you the maximum amount of financial security.