Which Life Insurance Policy Is Right for Me?

How to choose the right life insurance policy? Know why you buy life insurance and decide whether a term, whole or universal life insurance is right for you.

Deciding to buy a life insurance policy is an important step in anyone’s financial life. Some people say that when you purchase your first life policy, you’ve reached a key milestone of adulthood.

That might be the case, but even after you have the revelation that now is the time to get life insurance, you need to choose what kind best suits your needs.

Key Takeaways

Term polices cost the least and are the simplest kind of life insurance policy, with clear-cut premiums, time periods, and benefit amounts.
So-called "permanent" insurance includes both "whole life" and "universal" type policies
Whole life insurance has fixed premiums and never expires. It builds cash value that you can access in various ways
Universal life policies come with investment components and adjustable premiums. They have a cash value, serve as managed investments, and you can borrow against them

In a way, the choosing the right insurance policy is like shopping for a car.

You start out knowing you need one but wonder where to begin. A sub-compact might do if you’re single, but won’t be a good idea if you have a large family. And what about prices?

Regardless of the vehicle you choose, will your budget allow you to buy it, or is it wiser to shop based on price, the core features you need, and the reputation of the dealership?

Different Types of Life Insurance Policies

It’s not enough to just recognize the need for buying life insurance. In order to choose the right kind of coverage, you need to understand the basics of the different types of life insurance policies.

Term Life

Term polices cost the least and are the simplest kind of life insurance policy, with clear-cut premiums, time periods, and benefit amounts.

Whole Life

Whole life insurance comes with fixed premiums and never expires if you make on-time payments. It also builds cash value that you can access various ways, even if you decide to surrender or cancel the coverage.

Permanent Life

So-called “permanent” insurance includes both “whole life” and “universal” type policies.

Universal Life

Universal life policies are more complex forms of permanent insurance. They come with investment components and adjustable premiums. They have a cash value, serve as managed investments, and you can borrow against them.

Know Why You Buy Life Insurance

You also need to examine your motivations a bit. That’s because if you know your reasons for wanting coverage, you’ll be better able to choose the exact right kind of policy.

For instance, is your primary goal to simply give your family (or whoever your beneficiary is) financial security after your death? If that’s the case, then a term life insurance policy might be wat you need.

Likewise, you might want a benefit amount large enough to make a substantial donation to a charity, pay for college expenses for children or grandchildren, pay off your home, pay for taxes on a large estate, build wealth during your lifetime through various investments, have a resource that you can borrow from later in your life, because your mortgage lender requires you to have a life policy in place, or some other reason. If so, then you should look at whole life insurance policies.

The truth is, there are dozens of reasons and combinations of reasons behind buying life insurance, and they vary by income level, age, financial goals, and personal preferences of the buyers. Take time to make a short list of the reasons you want to acquire life insurance coverage. It’s okay if you only have one reason, and fine if you have 10 or more. Just be honest and clear with yourself about your motivation.

Deciding Which Kind of Life Insurance to Buy

Below are a few questions to help you get started on which type of insurance may be right for you:

I want to / I need to:	Term Life	Whole Life	Universal Life
Provide my family financial security after my death, to pay for my kids’ college and settle any debts (mortgage, loans)	x	x	x
Get short-term coverage	x
Be covered my whole life		x	x
Keep my premiums low	x
Get long-term coverage but I have a limited budget	x
Have fixed premiums	x	x
Satisfy a mortgage lender's requirements when buying a home	x	x	x
Have a enough death benefit to leave a charitable donation, pay for a grand-child's college tuition, or pay estate taxes upon my death		x	x
Build wealth (cash value) that I can access in various ways		x	x
Decide how the cash value of my policy is invested			x
Be able to change my premiums and coverage as needed			x

When to Choose Term Life Insurance

Most people who purchase term policies opt for coverage that lasts somewhere between 10-year and 30-year terms. These policies do not come with any “cash value,” which means you can’t borrow against them or receive a payout if you surrender them. When the policy term is up, the policy simply expires.

Of all types of insurance, term is the lowest-cost option. If you die before the term is over, the policy pays the specified benefit amount to your designated beneficiary.

If you outlive the policy, there is no payout because the policy no longer exists. Note that some term insurance products offer a feature called “convertibility,” which means you have the option to switch the policy into whole life (with some or all of the original coverage amount). You’ll pay more for a conversion option because it’s an enhanced form of term insurance and doesn’t require a medical exam when you do the conversion.

Term life is often the preferred choice for young families on tighter budget, or as a life insurance option for seniors.

When to Choose Whole Life Insurance

Whole life is appropriately named. If you continue to pay the fixed premiums on time, the coverage lasts your “whole life.” Whole policies come in a wide variety of shapes and sizes. Most typically, they have a cash value that increases as the years pass. You can borrow against that value after a certain, minimum number of years elapse.

Additionally, you can opt to surrender the policy after it’s been in effect for a set number of years and receive the cash value as a direct payment to you during your life.

People with families and long-term financial responsibilities often choose whole life for the cash value feature, even though premiums are higher than what they would pay for term coverage with the same death benefit amount.

When to Choose Universal Life Insurance

Universal life insurance polices are similar to whole life, but you get to choose how the cash value is invested. If your investments do exceptionally well, your cash value could be very high. If they do poorly, then the opposite holds true.

These policies also come with adjustable premiums and several different ways of taking advantage of the investment feature. Universal life is the most complex of the three basic types.

Get the Help You Need

There are many aspects to consider when choosing a life insurance policy, but you don’t need to become an expert on the subject to make the right decision.

Term life insurance is simply the right choice for the majority of consumers who simply want to offer financial stability for their loved ones.

If you are interested in permanent life insurance, it’s a good idea to speak with an expert who can explain the many options available to you.

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