According to a June 2020 article from the Life Insurance Marketing and Research Association (LIMRA), 36% of Americans intend to buy life insurance in the next 12 months – an all-time high. That translates to millions of people from all different backgrounds – so clearly there are a lot of different reasons for buying life insurance. Many get it to protect family members who depend on them for income – and while that is perhaps the most common reason to get a life insurance policy, it is by no means the only one:
- Single people without children buy it to protect their parents against loan default if they die before paying off student loans
- Parents of adult children with special needs buy life insurance to help pay for ongoing care after they’re gone
- Young professionals and entrepreneurs buy it as a life-long wealth-building and financial protection tool
- Affluent seniors get it as a tax-advantaged estate planning tool
How can a single financial instrument do all those disparate things? Because there are actually many different kinds of life insurance with different sets of features and advantages. But before we discuss how they differ, it’s important to note that every policy has to define the same set of key features:
- The death benefit - The amount the insurance policy will pay when the insured dies. It is typically income tax free, unless the premiums were paid for with pre-tax dollars3.
- The beneficiaries - The people or entities that will receive the death benefit. It can all go to a single person (e.g., a surviving spouse), or it can be divided by percentage among many different people and entities (e.g., three children could each get 30%, and 10% could go to a charity).
- The policy length - The time period that the insurance company agrees to pay a death benefit. This can be a specific term, e.g., 10 or 20 years or it can be permanent – a policy that lasts for the lifetime of the person insured
- The premium - The monthly or yearly payments needed to keep the policy in effect.
- The cash value - Permanent life insurance policies have a cash value component that builds over time and can be cashed out or borrowed against4,5. A term policy has no cash value.
There are two basic types of life insurance: Term and permanent
A term life policy provides coverage for a specific period of time, typically between 10 and 30 years. Permanent life insurance is designed to last your entire life.
Term life is sometimes called “pure life insurance” because, unlike whole life or universal life insurance, there’s no cash value component to the policy. On the other hand, for a given death benefit (say, $100,000) term life premiums are typically lower compared to a permanent policy. But it’s important to remember that once the term ends, so does the death benefit. You have to go without coverage – or apply for another policy, which may cost substantially more because you’re older.
Most term policies are level term, which means you pay the same monthly premiums for the entire length of the policy. If you shop around, you can also find increasing term policies, with monthly premiums that start out a bit lower than a level term policy. The trade-off is that premiums increase a bit each year so that you end up paying more over the entire policy length.
Why people choose term life: Individuals with young families tend to buy life insurance as “Income replacement”: if they die, the benefit can replace part or all of the salary they would otherwise have earned to provide for their spouse and children. As noted, this kind of life insurance may be the most cost-effective way to get a large death benefit for a limited number of years, for example, while your children are still at home.
Permanent life insurance provides coverage that lasts your entire life. Unlike term, it’s not a “pure life insurance” product because it includes a cash value component, which helps in providing other benefits beyond the death benefit.
There are two main types of permanent life insurance: whole life and universal life.
Whole life insurance is the simplest form of permanent life insurance with the most guarantees. The premium remains the same for life, the death benefit is guaranteed, and the cash value grows at a guaranteed rate.
What is cash value? A portion of each premium payment can grow tax-deferred – in a way that provides numerous benefits you can use while you’re still alive. Over time, it can grow into a useful sum that can be borrowed against in a tax-advantaged way, used to pay premiums, or even surrendered for cash to help fund your retirement. The guaranteed growth rate varies by provider and policy: For example, Guardian whole life insurance plans offer eight different options along with the opportunity to earn dividends (because it is a mutual company owned by the policyholders).
Why people choose whole life insurance: It can be a powerful financial tool that can literally provide a lifetime of benefits. From the first day a whole life insurance policy is in effect, it will provide a death benefit, which can act as income replacement to lessen the financial consequences of an unexpected death. Over time, it can grow into an asset that can be used to help get you through a period of financial stress. Decades later, it can be used to enhance your retirement and even help with your tax strategy for assets passed to the next generation.
Universal life insurance is also designed to provide permanent insurance coverage and cash value growth, and it can be less expensive than whole life6. Unlike whole life, the premiums, death benefit, and the growth rate can vary, making these policies more complex. But universal life also offers more flexibility: certain kinds of universal policies let you tie your growth to an index, such as the S&P 500 Index7 or other kinds of investment options8. You can also raise or lower your premium payments within certain limits set by the policy. The tradeoff here is that you also have to keep track of your cash value because it can decrease if you only make minimum premium payments over time – and if it gets down to zero, your policy could lapse.
Why people choose universal life: These policies offer many of the same permanent coverage and cash value benefits as whole life, while offering greater flexibility. The ability to raise or lower premiums may be particularly useful for people with variable incomes, making the advantages of permanent life insurance more easily attainable.
The following chart highlights the key differences between the three types of policies.
Term life, whole life, and universal life compared
|Term Life Insurance||Whole Life Insurance||Universal Life Insurance|
|Coverage period||Limited to a specific term (typically 10-30 years)||Permanent lifetime protection||Permanent lifetime protection|
|Builds cash value||No||Yes||Yes|
|Cost for a given death benefit||Less expensive than whole or universal||More expensive than term||More expensive than term, but may cost less than whole life|
|Premium||Typically fixed||Typically fixed||Can vary|
|Income Tax-free death benefit||Yes||Yes||Yes|
|Investment options||No||No||Yes, depending on the type of policy|
|Primary uses||Income protection and replacement||Income protection; tax-deferred asset accumulation; tax-advantaged wealth preservation and transfer||Income protection; tax-deferred asset accumulation; tax-advantaged wealth preservation and transfer|
Riders are optional provisions that give you added protection and benefits9. A policy can last for decades – or even a lifetime – and you can’t really predict how things will change in that time. Your health could unexpectedly change. You may lose your ability to work at some point. The fact is, good and bad things will happen – but riders can add flexibility and provide extra financial protection and support along the way. Available term life riders include:
- Term conversion rider - This lets you convert a term life insurance policy to a permanent policy for a specified period, without having to undergo a medical exam. That’s important because if your health takes a turn for the worse, conversion may be the only viable way to provide the death benefit you want for your family.
- Waiver of premium rider10 - If you become disabled and can’t work, this rider will pay your premium, allowing you to keep your policy in effect.
- Guaranteed renewability rider or clause - Many term policies will let you renew your policy on a year-to-year basis after the policy expires – but with typically higher premiums. It may be more economical to get a new policy, but this rider can be useful for people who have been diagnosed with a serious or terminal disease near the end of their policy and have no other coverage options.
- Charitable Benefit Rider – This exclusive Guardian rider adds an extra 1% to your death benefit – up to a maximum of $100,000 – to be paid to the charity of your choice, over and above the amount paid to your designated beneficiaries11.
Generally speaking, permanent insurance policies have more riders available and are more customizable because they’re designed to cover a lifetime of different possibilities. Here are just a few of the options available for whole and universal life insurance:
- Waiver of premium rider - If you become disabled and can’t work, this rider will pay your entire whole life premium, allowing you to keep your policy in effect.
- Accelerated benefit rider - This provides a portion of the death benefit. At the same time, you are still alive to help pay for medical costs from a chronic (but not necessarily terminal) condition. There is no additional premium charged for adding this to a Guardian policy.
- Guaranteed insurability rider - This allows you to increase the size of your death benefit at certain times without providing evidence of insurability or undergoing a new medical exam – effectively letting you lock in lower rates now and potentially get a bigger policy later. Guardian gives you up to eight option dates throughout your life to purchase additional coverage.
- Accelerated Death Benefit for Long-term Care Services rider - Ability to accelerate payment of the death benefit in certain circumstances. It is available on both single life and survivorship products.
- Disability income rider - Similar to disability insurance, this rider will provide you with income if you should experience a qualifying disability that keeps you from working. The monthly benefit is typically paid until you reach retirement age, or the disability ends.
Once you have a better understanding of the different kinds of life insurance available, you should think about how much you may need. If you’re getting a policy primarily as income replacement protection for your family, there are a few general methods for determining how much may meet your needs:
- Consider 10x your salary This is one of the most straightforward rules to follow, and it can provide a useful cushion for your family – but it may not take all your actual expenses and needs into account.
- Consider 10x your salary, plus college expenses If you add $100,000 - $150,000 for each child, that can help ensure they can achieve more of the opportunities you want for them.
- Consider using the DIME formula DIME stands for Debt, Income, Mortgage, and Education. Total your debts, mortgage, and college expenses, plus your salary for the number of years your family needs protection (e.g., until the children are out of the house), and that can help you gain an understanding of your coverage need.
- Consider the Human Life Value formula - Some financial representatives calculate the amount you need using the Human Life Value philosophy, which is your lifetime income potential: what you’re earning now, and what you expect to earn in the future. In its simplest form, the philosophy suggests that you multiply your income by a variable based on factors such as age, occupation, projected working years, and current benefits.
As with every individual, the amount of recommended insurance you purchase depends on many factors. A simple way to get that number, however, is to multiply your salary times 30 if you are between the ages of 18 and 40. The calculation changes based on your age group, so please refer to the chart:
|18-40||30 times income|
|41-50||20 times income|
|51-60||15 times income|
|61-65||10 times income|
|66-70||1 times net worth|
|71-75||1/2 times net worth|
Whatever amount of coverage you decide to get, you may be pleasantly surprised by how affordable life insurance can be. People often overestimate the cost, but a healthy 30-year-old male can get a $1,000,000 Guardian Level Term policy for 20 years, with a monthly premium of just $61.
Any of those methods are a good start, but it also makes sense to talk with an experienced professional – like a Guardian representative – who can guide you through the process of calculating your actual need.
Life insurance policy costs
People tend to overestimate the cost of life insurance. The reality is, a healthy 30-year old can get $500,000 of term life coverage at an affordable cost. Whole life and universal life coverage costs may be more individualized and harder to specify – and while they tend to cost more, they also provide added cash value. But to give you a better idea of what you might pay for a term policy, here’s a general guideline for different amounts of coverage, by age group and gender. To get a more personalized quote, try Guardian’s instant online quote tool.
|Age, Gender||Policy Amount||10 Year||20 Year||30 Year|
There’s one more thing you should know about life insurance: the longer you wait to buy it, the more expensive it may be. So don’t put things off. If you can purchase group life insurance through your employer or a member association, that may be a great place to start. You can typically get a basic level of coverage at an attractive rate – but don’t assume it’s enough. Life insurance is one of the most consequential financial purchases you can make – and it’s worth taking the time to look into all your options in order to get an individual policy that rounds out your coverage needs. If you have a financial professional you trust, talk to them about your needs. If not, Guardian can connect with a financial representative who will listen to your needs, tell you about the best ways to meet those needs within your budget, then help you decide.
What is the best life insurance policy for you?
The best life insurance is the policy that meets your individual coverage needs, fits within your budget, and gives you a level of financial protection that makes you feel more confident about the future. If you’re not sure how to get a policy that does that, then it’s a good idea to speak with a financial representative who can help.
What are the three basic types of life insurance?
- Term life insurance – a policy that covers you for a limited term of years without building cash value
- Whole life insurance – permanent coverage that builds cash value at a guaranteed rate with premiums that stay the same for life
- Universal life insurance – permanent coverage that builds cash value while giving you the flexibility to raise or lower premiums
How does a life insurance policy work?
It’s a contract between you and an insurance company. You agree to pay the insurer a monthly premium, and in return, the insurance company promises to pay your family a lump sum death benefit if you die while the policy is in effect.
What is better, term or permanent life insurance?
Both types of coverage have value. A permanent policy provides life-long protection with a tax-advantaged cash value component. A term policy provides coverage for a limited term with no cash value, but typically costs less than permanent life insurance.