The best types of life insurance for 4 life stages

Woman standing in her living room, holding her baby and reading on her phoneImage: Woman standing in her living room, holding her baby and reading on her phone

In a Nutshell

Finding the best among different types of life insurance depends on a lot of personal factors, starting with where you are in life. The most affordable option might be a term life insurance policy that allows you to choose the policy length and pay a lower premium. But if you have a family to support, it’s worth considering the lifelong coverage benefits of whole life insurance. Regardless of the policy, you’ll also want to consider the financial strength of the life insurance company to make sure it will be around to pay your claim (if it comes to that).
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Life insurance may not be the most exciting investment to ponder, but its benefits can be profound.

In the long term, a good life insurance policy can provide your family with financial security if you’re no longer able to take care of them. And in the short term, it can offer some serious peace of mind. Buying life insurance is an important decision, so it’s worth doing some research to find the best types of life insurance and the specific policies that make the most sense for you.

The two most common types of life insurance are term life insurance and whole life insurance, and they differ in several key ways.

Term life insurance

Term life insurance is usually the more affordable of the two. With a typical term life insurance policy, your family gets a payout if you pass away during the specified coverage period (or “term”). They could use this money to cover expenses like funeral costs and any outstanding debts. A term policy may provide life insurance for five, 10 or 20 years. It could also end once you reach a specific age.

The downside is that you will personally never see a dime of that money — and if you outlive the term policy, neither will your loved ones. Another thing to consider is that the cost of a term policy increases as you age — something that could tip the scales and make it a worse long-term proposition than a whole life insurance policy. Speaking of which …

Whole life insurance

Whole life insurance (also known as traditional permanent, straight life or ordinary life insurance) is a common type of cash value insurance. We’ll go over some less-common types at the bottom of this article, but for now let’s focus on how whole life insurance works.

As its name implies, whole life insurance provides coverage for your entire life instead of a specific term with an end date. That’s one reason why a whole life policy can be much more expensive than a term life policy. But those higher premiums also come with an additional benefit: They build up a cash value that can both help pay for the policy years down the line and be borrowed against if you need it.

And you can’t outlive your whole life policy. As long as you make your payments and stick to the policy agreement, your whole life policy will be with you for the rest of your life. It’s worth noting that some whole life policies require that premiums be paid throughout your lifetime, while others only require premiums for a number of years.

Now that we’ve defined the most common types of life insurance, let’s take a look at the best life insurance options for several life stages. While the best life insurance policy for you may depend on a number of personal factors we can’t consider here, this list should help steer you in the right direction.

The best types of life insurance for 4 life stages

Best for single adults on a budget: Term life insurance

You’re young and single. So why do you even need life insurance?

As a single adult living on your own with no one to support, taking out a life insurance policy might seem counterintuitive. After all, who will the death benefit go to? Your dog?

Some financial experts argue there’s no point to buying life insurance when you’re young and have no one to support. While that might be true for many, it overlooks some important facts.

Even if a prospective beneficiary doesn’t rely on you for financial support now, that person could use the money to cover the cost of your funeral, which is effectively an expense for you. And funeral costs aren’t the only thing to consider.

Say your parents co-signed your private student loans. It’s possible they could be on the hook for any amount left unpaid in the event of your death. You might consider taking out a large enough life insurance policy to pay those loans off so that mom and dad aren’t stuck with your debt at the same time they’re grieving your loss.

Ultimately, it’s a personal decision that only you can make, but there are definitely points to consider when deciding whether a term life policy is right for you. And rather than leaving your benefits to Fido, you might think about naming your partner or nearest relative — a parent, brother or sister, or anyone else who would be taking on the responsibility of your funeral expenses or resolving any other financial responsibilities for you — as a beneficiary.

Insurance provider to consider: Your employer’s plan (if available)

If you’re on the hunt for an affordable entry into life insurance, start by checking with your employer rather than an independent insurance agent. Many companies offer a term life insurance benefit for free or at a discounted rate as part of a benefits package. If yours doesn’t, consider getting a life insurance quote from several life insurance providers to find a policy that works with your budget and provides your loved ones with a degree of financial security.

Best for young families: Whole life insurance

If you want to provide for your family while also investing in your future, a whole life insurance policy could be a good option to consider.

As we’ve noted, whole life insurance has its pros and cons. It’s typically more expensive than term life insurance, because, in addition to the death benefit, your policy accumulates cash value over time, which you can borrow against. That may be a helpful benefit as your family grows.

And like the name implies, whole life insurance stays with you for your whole life, or at least as long as you continue making on-time payments and adhere to the policy’s terms and conditions. So once your policy is set, you’ll have coverage while your family is young and you can rely on your policy to carry you through your later years.

Insurance company to consider: MassMutual

If you can’t imagine making payments for the rest of your life, MassMutual offers a Whole Life Legacy 10 Pay that allows you to make payments for 10 years. After that, you can stop paying, and instead of the policy being canceled, the cash value will continue to grow.

Best for investing in your child’s future: Whole life insurance

If you’re a new parent, you may want to consider taking out a child insurance policy that your kid could tap into later down the line. And though this is a form of whole life insurance that covers children should they die, the main reason we’re looking at it is for the benefits your child could see later in life, when they’re ready to pay for college or buy their first home.

With the cost of college on the rise, your child may appreciate having the ability to borrow money against the cash value of a life insurance policy to help pay for their education. Your child could also tap into the insurance policy to help make up a down payment for a first home or to pay for a financial emergency.

Hopefully, you’ll never need to tap into the death benefit. We understand that no amount of money will ever make up for the loss of a child. But a life insurance policy for a child could be an investment in your child’s future, while providing you with the knowledge that if tragedy strikes, the coverage can help.

Insurance company to consider: Gerber Life Insurance

If you’re interested in getting whole life insurance for your children, check out the Gerber Life Grow-Up Plan from Gerber Life Insurance. As a child insurance policy, it does more than just protect you as a parent if the unthinkable happens. It’s also a way to accumulate cash value that your child can borrow money against later in life.

Best for older adults: Guaranteed issue life insurance

If your kids have long since left the house, you might not feel the need to pay for an expensive life insurance policy. But it may still be worth considering taking out a small policy to help your family pay for your funeral expenses.

If you’re concerned that old age or bad health might lead to your being denied coverage, you could look for what’s known as a “guaranteed issue” life insurance policy, which doesn’t require a medical exam. One potential downside? You might be charged higher premiums.

Like the name implies, you won’t be turned away from a guaranteed issue life insurance policy because of your age or poor health. Unfortunately, these policies tend to have more-expensive premiums, making them a last resort for many people.

Insurance company to consider: AAA

AAA offers one of the best guaranteed issue life insurance policies we could find. It doesn’t require a medical exam, and the death benefit can be as high as $25,000. You can apply for the policy as long as you’re between the ages of 45 and 85.

Unfortunately, if you die within two years of taking out the policy, your family won’t receive the full death benefit. But what’s nice about AAA is that your loved ones will receive 30% more than all the premiums you paid on the policy. This is up to three times as much as some of the other insurance policies we evaluated.

How we picked the best types of life insurance for each life stage

We started by considering the different needs people might have at various stages of life.

If you’re a single adult, you might have less need for a top-of-the-line life insurance policy with high premiums and high payouts. Conversely, if you have young children, you might want a policy that keeps the door open to investing in their future.

We can’t possibly consider all the factors that may go into your decision, but we tried to consider life insurance policies that generally meet the needs of people at these major life stages.

Other types of life insurance to consider

While term life insurance and whole life insurance are some of the more common types of life insurance you’ll come across, they aren’t the only options out there.

As we noted earlier, whole life insurance is one type of cash value insurance, which combines a death benefit with the ability to accumulate cash over time. Here are some other types of cash value insurance you may want to consider.

  • Variable life insurance — This type of life insurance has a death benefit that’s tied to the performance of certain investment assets. The value of the death benefit varies depending on the performance of those assets, which could mean a higher or lower payout depending on interest, timing, investment performance and other factors.
  • Universal life insurance — If flexibility is what you’re after, a universal life insurance policy could make sense. This type of policy may allow you to vary the amount of your premium payments or even skip certain payments. The death benefit is also adjustable, and you’ll accumulate cash value from a combination of premium payments and interest.
  • Variable universal life insurance — As its name implies, this is a combination of the above types. It’s “variable” in the sense that its value is also tied to certain investments, and “universal” in the sense that it allows for some extra flexibility.

A note on financial strength

When choosing among different life insurance policies, it’s important to pay attention to the financial strength of different insurance companies.

What do we mean by “financial strength”?

Financial ratings agencies, like A.M. Best, assign what’s called a Financial Strength Rating to various insurance companies. This rating measures a company’s ability to meet its ongoing insurance policy and contract obligations. In other words, it should give you a decent idea of whether a company will be able to make good on paying your claim.

You might consider comparing the FSR ratings of various insurance companies before settling on a policy. You can start by searching for a specific company on A.M. Best’s website and reading its Financial Strength Rating Guide. Note that you’ll have to register to access the rating content.

How to make the most of a life insurance policy

We realize life insurance may not be right for everyone.

It’s certainly worth considering taking out a term life insurance policy if your loved ones depend on your income, or if they’d be responsible for repaying your debts. But it’s up for debate whether whole life insurance (or another type of cash value insurance) is a good investment, and it’s probably something you should chat about with your financial adviser and an insurance professional.

What’s most important when it comes to deciding on an insurance policy is finding a plan that makes you feel financially secure.

About the author: Tim Devaney is a personal finance writer and credit card expert at Credit Karma. He’s a longtime journalist who prides himself on being a good storyteller who can explain complex information in an easily digestible wa… Read more.