There are so many life insurance options that the complexity can paralyze you into not making a decision. This is a problem since life insurance is important if you have dependents, are a sole or majority income provider, and have major debt.
Personally, I took out a 10-year, $1 million term life insurance policy when I was 28 when I took out about $1.2 million in mortgage debt. I didn’t want to saddle my girlfriend at the time, the burden of having to may off that mortgage in case I were to die. She lived with me in the house and was the beneficiary of the house. I already knew I wanted to marry her.
Then I decided to take out another 10-year term life insurance policy in my later 30s in anticipation of having children. Three years after I took out the policy, I had my son, who is a miracle. Then we miraculous had a daughter 2.7 years later! It was then that I realized I should have taken out a 20-30-year term life insurance policy instead..
When I went back to try and get more life insurance at age 42, I was met with a surprise that my premium would go up multiple fold because I was over 40 and had gone to the doctor to check out my snoring, for fun! Lesson learned. Never see a doctor for a non-life-threatening health issue before getting the ideal life insurance policy you want.
Not only do I regret not getting a longer term life insurance policy, I kind of regret not getting a permanent life insurance policy that could have taken advantage of the bull market since 2009.
To minimize confusion, let’s have a detailed look at all the various life insurance options so you can make the best choice for you and your family. I’ve spent over 30 hours analyzing all the life insurance options.
All The Life Insurance Options
There are two main life insurance options: term life and permanent life. Under permanent life, there are many sub-options of life insurance. Your main goal is to decide whether you want to go with the cheaper term life option or the more expensive permanent life option that provides a cash value that gets invested and grows over time.
Two Main Life Insurance Options
- Term Life (main life insurance option and most popular)
- Permanent Life (second main life insurance option)
Permanent Life Insurance Options
Later Stage Life Insurance
- Guaranteed Issue Life Insurance
- Final Expense/Burial Life Insurance
- Simplified Issue Life Insurance (can be term or permanent)
Special Situation Life Insurance
Term Life Insurance (Main Option)
Term life insurance is a life insurance contract that comes with an agreed upon coverage expiration date. Typical terms are 10 years, 20 years, and 30 years.
During the term, you agree to pay regular premiums, usually monthly, in exchange for the amount of coverage. If you die within the term of your policy, your beneficiaries will receive your coverage amount.
Further, the coverage amount your beneficiaries will receive is tax-free. Here are the main considerations when shopping for term life insurance:
- Term Length: 10, 20, 30 years are most common.
- Coverage Amount: $50,000 – $1,000,000 is most common.
- Beneficiary: Surviving children and spouse are most common.
- Medical Exam: Not needing a medical exam is most common because most life insurance policies $500,000 or less do not require one. But if you are very confident in your health, you may want to take a medical exam to reduce your rate.
I got a 10-year, term-life insurance policy with a $1 million death benefit, twice. I had to get a medical exam where they took my urine and my blood.
Term life insurance is what I recommend for 80% of the population. It’s affordable and does its job. Think about a term life insurance policy like renting an apartment when you need a place to live. You don’t build any equity (cash value), but you also don’t have to pay extra to build up the cash value either.
Permanent Life Insurance (Main Option)
For the other 20% of the population, I think permanent life insurance may be appropriate. With a permanent life insurance policy, you’re entering an insurance contract that can last for the rest of your life.
For those of you who have a lifelong dependent such as a child with a disability and/or who plan to accumulate much more than the estate tax exemption amount, a whole life insurance policy is a tax efficient way to provide life insurance coverage and grow wealth.
Think about a situation where you may have a pre-existing, life-threatening condition that could grow worse over time. Think about a situation where you have a child with Down’s Syndrome. If you’re making a lot of money and maxing out your 401(k) and other tax-advantageous retirement accounts, getting a permanent life insurance policy can make more sense.
Permanent life insurance is more expensive because your premiums go to covering your life (death benefit) and to building your cash value. Think about a whole life insurance policy like paying an amortizing mortgage that goes to interest AND principal. It’s more costly than just getting an interest-only mortgage.
Permanent Life Insurance Options
Even though I think most people should get a simple term life insurance policy, the most amount of life insurance options comes from a permanent life insurance policy, also sometimes referred to as whole life. After all, life insurance is a business. Life insurance companies have found ways to meet various demands and make more money through permanent life.
With a standard permanent life insurance policy, your cash value works like a savings account growing at a moderate interest rate. You can borrow against your cash value or cancel the policy and receive the cash minus surrender fees. A permanent life insurance policy is a type of retirement planning strategy that wealthier Americans exercise.
The cash value is the key different between a permanent life insurance policy and a term life insurance policy. It can be used and invested in different ways through these main different permanent life insurance options:
- Universal Life: You can use your policy’s cash value to lower your premiums or increase your death benefit later in life. Universal life is the most common type of permanent life insurance.
- Variable Life: You can invest your policy’s cash value in mutual funds to potentially earn a greater return on your cash value.
- Variable Universal Life: Combination of Universal and Variable life insurance. You can use the cash value to change the amount of your premiums or death benefit.
- Indexed Universal Life: Like Variable Life, you can invest your cash value in a stock index and use the money to change the amount of your premiums or death benefit.
In retrospect, now that my family’s wealth is on pace to exceed the historical estate tax exemption amounts for two people thanks to a lucky bull market, I should have taken out a Variable Life or Indexed Universal Life insurance policy back in 2005 when I first got a 10-year, term life insurance policy. These type of life insurance policies would have helped us build even greater wealth.
Let’s go through each permanent life insurance policy in a little more detail.
Universal Life Insurance
Universal life is the most common type of permanent life insurance. It’s generally a more conservative type of permanent life insurance that has a minimum guaranteed cash value return. The cash value is invested conservatively by the life insurance company, usually in various low-risk, high-quality short term fixed income investments.
Universal life lets you change the relationship between your policy’s death benefit amount and cash value. When you have enough cash value built up, you could even stop paying premiums by using your cash value to keep the policy active. You will need a lot of time to accumulate enough cash value if you plan to go this route.
With universal life, you get to keep permanent life insurance and pay a lower cost for the coverage later in life.
Below is a benefit growth chart example of a universal life insurance policy. The death benefit is for $500,000 and the monthly premium is $830. $830 is not cheap compared to a term policy that may only cost this 42-year-old healthy male $120/month or less.
However, as you can see from the chart, after 21 years, the cash value grows to $237,452 from zero and the total death benefit equals $500,000 + $237,452 = $737,452.
Variable Life Insurance
Variable life can be a good option because you get to invest your cash value in mutual funds that may grow by a greater amount over time. We just went through a huge 10-year bull market from 2009-2019. For example, investing the cash value in the S&P 500 mutual fund would have provided for a handsome return.
However, just like how your employer decides what funds you can invest in in your 401(k), your insurance company will provide a list of mutual funds in which you can invest your cash value. You don’t have carte blanche freedom like a rollover IRA.
Of course, if you invest your money at the top of the market, your cash value will likely lose money and underperform a more conservative universal life insurance policy.
Variable Universal Life Insurance
Variable universal life insurance combines elements of variable life and universal life policies – a hybrid approach.
Like universal life, you can eventually change the relationship between your cash value and your death benefit, lowering premiums, or increasing your death benefit.
Like variable life, you can invest the money in insurance company-directed mutual funds.
Depending on the cost and your funds, a variable universal life insurance policy could be the best of both worlds. However, a variable universal life insurance policy is probably not the most appropriate policy for someone who wants to simplify his or her life insurance needs.
Indexed Universal Life
With indexed universal, you can connect your cash value to a stock index such as the S&P 500. The money can grow at the same rate as the stock index.
As with variable universal, the insurance company can cap your growth at a specific percentage during a hot streak in the markets. And, when your cash value grows enough, you can use it to subsidize your premiums.
Given most actively-run money managers cannot outperform the indices they benchmark to over the long run, as an investor, you are wise to invest in a passively run index instead. If you are thinking about choosing between a index universal life and a variable universal life, make sure you assess the fund options.
Check out this chart showing the high percentage of actively-run mutual funds underperforming their indices over a 10-year period. High fees and human nature definitely drag on performance.
For example, the chart shows that 84.49% of mutual funds net of fees UNDERPERFORM the S&P 500 index over the last 10 years. Higher fees + bad active fund management is a bad combination.
Main Ways To Apply For Life Insurance
The best way to apply for life insurance is to leverage the internet instead of apply to one life insurance company one-by-one. And the best online life insurance platform to get competitive quotes is PolicyGenius.
PolicyGenius was built from the ground up to not only create a competitive life insurance marketplace for people seeking life insurance, PolicyGenius also helps life insurance seekers find the most appropriate life insurance policy at the best rate for each individual situation.
Once you’ve applied online to know what’s out there, here are the three general ways the life insurance application process proceeds.
Medically Underwritten Life Insurance
Medically underwritten life insurance almost always requires you to take a medical exam. The exam will calculate your body-mass index, get your blood pressure, your height, your weight, and take blood and urine samples to test your overall health.
Most people, including myself, hate getting a medically underwritten life insurance policy because most people hate needles.
For those who don’t want to get a medical exam, you have many options as well. Also, if you get under a $1 million policy, chances are higher you won’t need to do a medical exam.
However, if you are in great health and just got your physical with bloodwork, you may want to get another free medical exam to prove to the life insurance companies you are indeed in great health to get a lower premium.
Simplified Issue Life Insurance
Simplified issue life insurance is what we all want. A simplified issue life insurance lets you skip the dreaded medical exam with needles.
Instead of collecting your urine and poking you with a needle, the life insurer will ask a variety of questions about your health and your family’s health history. They will also check your medical profile to see what type of issues you’ve had. They will also check your driving record, so be aware!
Given there is no medical exam, expect to pay more for simplified issue life insurance, and expect lower coverage amounts. Life insurers are taking a higher risk on insuring you, therefore, they must charge higher premiums.
Simplified issue life insurance usually tops out around $350,000 to $500,000 — significantly lower than a medically underwritten policy. But given most Americans have less than a $500,000 net worth, $350,000 – $500,000 should be sufficient for most Americans.
Guaranteed Issue Life Insurance
Guaranteed issue life insurance is even easier than simplified life insurance. You just need to answer some basic questions because there are no health requirements.
As a percentage of coverage, the insurance premiums are high. But as an absolute dollar amount, the coverage amount and premiums are low.
For example, you can get a $20,000 guarantee issue life insurance policy at age 50 for $71 a month. Below are some sample quotes from Mutual of Omaha.
Special Life Insurance Options
Now that we’ve talked about the main life insurance options, here are lesser known life insurance policies you can get for more specific reasons.
Burial Life Insurance
The death benefit should be significant enough to pay your final expenses, which may include small debts or funeral expenses.
If you have a whole/permanent life insurance policy, you shouldn’t need burial life insurance.
Mortgage Life Insurance
Mortgage life insurance is a simplified life insurance policy that pays off your mortgage balance if you were to die. could pay off your house if you died with a mortgage balance.
Just note that a mortgage life policy would pay your lien holder and not your family if you died.
If you have a term life insurance policy that matches the duration of when you will pay off your loan, you won’t need mortgage life insurance.
Key Person Insurance
If you run a business, there is at least one key person that is crucial to your business’s success. If that person dies, your business could experience tremendous harm.
Now that I’m writing this, I realize I should look into key person insurance since I write 99% of the content on Financial Samurai as my wife takes care of our two kids full-time.
Life Insurance Riders
In addition to reason-specific life insurance options, there are also life insurance riders you can add to help customize your insurance policy as life changes.
Here are the most common riders:
- Accelerated Death Benefit: Can pay part of your death benefit early if you’re diagnosed with a terminal illness or meet other requirements.
- Long-Term Care: Can pay part of your death benefit early if you need help paying for long-term health care.
- Accidental Death: Pays a higher death benefit if your death results from a qualifying accident.
- Child Term: Can extend part of your coverage to one or more of your children.
- Waiver of Premium: If you outlive your term policy, this rider could return your paid premiums.
Riders will aways cost extra.
Life Insurance By The Numbers
If you’re still hesitant about getting life insurance, here are some interesting facts about life insurance by PolicyGenius, my favorite insurance marketplace where you can get free life insurance quotes in one place.
57%: Percent of American adults who have life insurance
32%: Of American adults with life insurance, the percent who only have group coverage — which usually isn’t enough (and is rarely portable)
10x to 12x: The multiples of your annual income that most financial advisors recommend you need when buying life insurance for income replacement.
50%: Percent of life insurance policies are purchased via independent agents (like PolicyGenius advisors, who are not beholden to any one insurance company)
40%: Percent of life insurance policies purchased via affiliated agents (meaning they only sell products for one insurance company)
Cost of Life Insurance Statistics
6x-10x: How much more permanent life insurance (like whole life insurance) costs vs. term life insurance
8%: Average percent increase in your insurance costs as you age, assuming your health stays the same. This is why you should get life insurance younger rather than later.
30%: The average cost difference between sequential health ratings (preferred vs standard, for example)
2x to 3x: How much rates for smokers cost vs. rates for nonsmokers (but a year after you quit smoking, most companies will offer you nonsmoker rates).
50%: The average difference between the least expensive and most expensive rate for the same person across insurance companies. This is why you should shop around for life insurance!
30%: Percent difference between premiums for men and women (with women paying nearly ⅓ less than men, on average).
Get Life Insurance To Protect Your Family
Life insurance is an act of kindness. The last thing you want your surviving loved ones to do is have to worry about finances if you die.
Hopefully this article has explained the different life insurance options clearly. For 80% of you, getting a term life insurance policy is good enough. Just make sure you get the appropriate death benefit amount and term coverage.
Getting the appropriate term and death benefit amount will depend on your stage of life and your finances. However, you must actively try and forecast your future. It’s better to have a little too much life insurance than a little too little.
For those of you who want guaranteed life insurance for your whole life, consider a permanent life insurance policy. This way, you don’t have to worry about not having enough as you get older and less healthy. The cash value benefit is definitely attractive since your investments grow tax-deferred.
The most efficient way to get competitive life insurance quotes is to check online with PolicyGenius, the #1 life insurance marketplace where qualified lenders compete for your business.
Good luck and stay safe!