What are the most common types of life insurance?

BY RACHEL LAYNE

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Life insurance is a part of good financial planning. Your coverage should fit your circumstances.

Roughly half of Americans had life insurance in 2021, according to a report from the industry association group LIMRA. If you're not one of them, you may be wondering if you should look into 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, people you designate as beneficiaries get an agreed-upon sum when you die through your life insurance policy.

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

If you don't have life insurance or want to boost how much you already have, now is a good time to get started. You can begin with a price estimate today.

"Most people don't expect to die unexpectedly. 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 he considers 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 needed to drive a car, life insurance can be an essential part of your financial picture.

"Married couples, anyone with a dependent and business owners" should seriously consider carrying life insurance, said Martin A. Scott, a CFP and the founder of Lasting Wealth Principles in Freehold, New Jersey, who specializes in advising people in their 30s and 40s.

How can I get life insurance?

You can buy life insurance either individually or through 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 buy policies online, too. It's prudent to shop around. Most experts recommend you consult with 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. Augustine, Florida, advises clients to also speak with a Chartered Life Underwriter (CLU).

"I do recommend speaking with a financial planner and an insurance broker together," Lao says. "This way the recommendations are coordinated and there are multiple sets of eyes on this."

If you're looking for life insurance there are multiple 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 payout you determine your beneficiaries may need after you're gone.

Then take into account 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 an inheritance to someone for future expenses.

Usually, beneficiaries collect life insurance payouts tax-free. Lao recommends using an insurance calculator to figure out your needs and generally advises people to consider coverage valued at a minimum of 10-times your gross income. It all depends on your situation.

What are the different kinds of life insurance? 

There are two main kinds of life insurance, offered in a variety of forms:

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

Here are popular versions of permanent and term life insurance:

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

Pros: 

• Effective for life (as long as you pay on time and don't cash in the policy)
• Some policies pay a dividend yearly (though usually not guaranteed)
• You can build up the cash value and may be able to borrow from the policy (premiums are locked in for life)

Cons:

• Usually more expensive than term life 
• Premiums may rise with age, so experts advise starting early
• If you need more coverage later in life it can be pricey

Term: Term life insurance covers a set number of years. That can be useful during certain periods of your life, like when you are raising a family. But you have to renew term life policies, and premiums often rise.

Pros: 

• Less expensive than whole
• You pay for what you need
• Good for a specific period of time (if raising a family, for example)

Cons:

• Only covers a set number of years in the policy
• Each time you renew premiums typically rise
• If you get sick or acquire a high-risk medical condition, you might 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 treats the three main parts of the policy separately:  premium, death benefit and cash value.

Pros: 

• More flexibility 
• Death benefits can be fixed or rise over time
• Can change the premium and benefit value
• The policy may be paid off early

Cons:

• If you pay less than the premium, benefits can lapse
• Easy to lose track and not build on the cash value
• If the value hits zero, the policy can lapse
• Can include "mortality" and expenses that climb with age

Other types of life insurance

• Variable: The benefit and cash value can vary, just as the name implies. Insurance companies invest your contributions in areas like stocks, bonds, and other investments, much like a mutual fund. As the policyholder, you assume that risk. If investments prosper, you get a higher return. If they fall, your premium can climb, cutting your policy's value. 
• Supplemental: This is what it sounds like: coverage on top of your primary policy. This can include insurance for your spouse, child or accidental death coverage. 
• Joint: This typically expensive option covers two or more people with the payout coming when the first person dies. Insurers view joint policies as riskier because a larger benefit payout is likely sooner and bigger overall.

In the end, your decision may depend most on who counts 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 building a family or want to protect or provide for a significant other? Income replacement concerns, debt concerns, future uncovered expense concerns, etc. These all play into the right circumstance," Crossland said. "If you're an avowed bachelor or bachelorette 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 start by getting a quote right now.