Types of Life Insurance
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UPDATED: Sep 30, 2021
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Financial tragedies, such as these, are avoidable with a little planning. Far too many people are daunted by the process or overestimate the cost of purchasing life insurance.
That should never discourage you from making inquiries and protecting your family with a policy that covers the worst possible scenario. Many Americans who do own some form of life insurance are underinsured! It’s important to make informed choices.
So, let’s check out the different types of life insurance that are available.
Life Insurance is Integral to Your Family’s Future Security
I ask my clients to take a cold hard look at their finances to see what would happen should the breadwinner fail to come home one day.
Most people live from paycheck to paycheck, so the answer is usually the same. In a nutshell, they would sustain unthinkable financial hardship.
So, now what? You know it’s a necessity, but there are so many different types of life insurance out there.
How do you find a policy that fits your particular circumstances?
I have been working in the life insurance industry since 2004 and have a deep understanding of the offerings currently available and am excited to share my insight with you.
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The Primary Categories of Life Insurance
There are 6 basic types of life insurance:
- Term Life Insurance
- Permanent Life Insurance
- General Life Insurance
- No-Exam Life Insurance
- Business Life Insurance
- Life Insurance Riders
There are two primary categories for life insurance: Term and Permanent.
In my humble opinion, Term works best for most people, most of the time.
I am not alone in this assessment. It’s supported by financial gurus, such as Suze Orman and Dave Ramsey.
The idea is that you take the difference in what you would have spent on a permanent policy and invest it in a vehicle with higher returns.
Hey, don’t get me wrong. There is a time and place for Whole life insurance.
For wealthy families in their 30s or 40s, whole life insurance may be worthwhile as an estate planning tool because you can create an insurance trust that can pay estate taxes out of the policy’s proceeds and then pass the trust to heirs. Is Whole Life Insurance a Good Investment? A Look at the Pros and Cons. David Weliver, Money Under 30 .
For most of us, though, Term is the best bet.
Term Life Insurance
Most people know or have heard of Term Life Insurance. It’s the most basic and affordable because it pays death benefits only.
I have a great glossary of life insurance terms that will give you more information about each of these choices.
Term Life Insurance Options
As you can see, there are numerous options to consider when you are looking at the different types of life insurance offered.
You should contact an independent agent so they can go through the pros and cons of each to see what fits you best:
- Level Term Insurance – This is the most common type of life insurance policy people are buying. This simply means that your death benefits remain the same throughout the life of the policy and the premiums you pay are generally fixed. Make sure you inquire about this, as some insurers do sell policies where premiums may increase.
- Guaranteed Term Life Insurance – For this type of policy the premium you will be paying is guaranteed to remain unchanged for the length of the term you purchase.
- Guaranteed Level Term Life Insurance – The premium for a Level Term policy is guaranteed to remain unchanged for the length of the term that you purchase. For example, typically for a 20 or 30-year term.
- Decreasing Term Life Insurance – With this type of policy, the death benefits decrease over various designated time increments throughout the life of the policy, but the premiums you pay remain the same. Many people use this type of policy to cover their mortgage.
- Increasing Term Life Insurance – Very few companies offer these policies, but they may be beneficial for young families on a tight budget. With this policy, the death benefits “increase” over various time increments. Generally, you would also see a corresponding increase in your premiums.
- Convertible Term Life Insurance – This is a feature that may be convenient down the road when you need to renew your policy and your health has declined. The conversion feature allows you to convert to a permanent policy, such as Whole life or Universal life, without having to take a medical exam so you can continue with your coverage. Keep in mind that you must decide to convert before the date specified, which may vary from insurer to insurer.
- Annual Renewable Term Life Insurance – This is a form of Term insurance that allows you to automatically renew the term you bought on your policy before it expires. You can do so regardless of health, but you will be paying a higher premium, as you will be rated according to your current age when you renew. These types of life insurance policies can be purchased as 1 year renewable or 5 year renewable.
- 10-Year Term Insurance – This type of Term policy will cover you for a period of 10 years. When it expires, you have to either renew it for another term or convert the policy to a permanent policy before the expiration date. To renew the policy, you will be required to undergo a medical exam and the cost will be based on the results of that exam and your age. The renewed policy will likely be more expensive than when it was first issued.
- 15-Year Term Insurance – This type of term policy will cover you for a period of 15 years. When it expires, you have to either renew it for another term or convert the policy to a permanent policy before the expiration date. To renew the policy, you will be required to undergo a medical exam and the cost will be based on the results of that exam and your age. The renewed policy will likely be more expensive than when it was first issued.
- 20-Year Term Life Insurance – This type of term policy will cover you for a period of 20 years. When it expires, you have to either renew it for another term or convert the policy to a permanent policy before the expiration date. To renew the policy, you will be required to undergo a medical exam and the cost will be based on the results of that exam and your age. The renewed policy will likely be more expensive than when it was first issued.
- 25-Year Term Life Insurance – This type of term policy will cover you for a period of 25 years. When it expires, you have to either renew it for another term or convert the policy to a permanent policy before the expiration date. To renew the policy, you will be required to undergo a medical exam and the cost will be based on the results of that exam and your age. The renewed policy will likely be more expensive than when it was first issued. This policy may no longer be available for older individuals, as some Term policy lengths have age cut-off dates.
- 30-Year Term Life Insurance – This type of term policy will cover you for a period of 30 years. When it expires, you have to either renew it for another term or convert the policy to a permanent policy before the expiration date. To renew the policy, you will be required to undergo a medical exam and the cost will be based on the results of that exam and your age. The renewed policy will likely be more expensive than when it was first issued. This policy may no longer be available for older individuals, as some Term policy lengths have age cut-off dates.
- Work Term Life 65 – This type of Term policy, which is only available through Prudential Life Insurance, allows you to buy at any age and will cover you specifically to age 65. This means that the term you buy will be customized to suit you at the age of purchase. If you buy a policy at age 22, it will actually be a 43-year term.
- Select-A-Term – This type of term policy, which is only available through American General, allows you to select a specific term for a number of years, such as 23 years (or some other term length). It is vital that you choose adequate death benefits and the length of the term carefully. You should look past your current situation to take into account the cost of inflation and what your earning power and future debts might look like in 20 or 30 years.
If you are looking to cover periods of time when the potential loss of your income or that of your spouse will make the most impact on your family, then 10 – 30 year Term insurance has got you covered.
Essentially, you have to decide how much coverage you need for death benefits, which can range from $100,000 (or lower) to $5 million plus.
Uses for death benefits include:
- Income Replacement
- Personal Debt Repayment
- Business Purposes
- Mortgage or Rent Payment
- Funeral and Burial Expenses
The second thing you need to decide is how long you will need life insurance for. Terms may be bought for as little as 1 year to cover business loans, for example, or you may purchase a term for 5, 10, 15, 20, 25 or 30 years.
A few companies will even sell policies which are age-specific, such as age 55 or 65, for example.
There is one catch, though. If your policy is about to expire and you need to renew it, the premium will cost you a lot more than when you originally bought it. Re-evaluation is based on your current age and health. Luckily, there are Term policies that cover these issues.
Permanent Life Insurance
If you are seeking lifetime coverage with a cash accumulation feature, Permanent life insurance may serve your needs. As mentioned above, I don’t think of life insurance as an investment, per se. There are better places to make money.
Permanent life insurance, also known as “Cash Value Life Insurance,” is issued in various packages.
These policies tend to be much more expensive than Term insurance for the following reasons:
- Coverage is for life, eliminating the need to renew the policy
- Provides death benefits
- Cash value accumulation feature, which builds up over the life of the policy
- Allows you to borrow against the policy
- Allows you to surrender the policy
Permanent life insurance is more expensive because of the cash value accumulation feature and can easily cost 10 times more than what you would pay for a Term policy. The cash value accumulation feature allows the insurer to take a portion of the premium for investment purposes, so you earn interest which builds over time.
There are also a number of administrative fees built into the premiums because of the cash value accumulation feature. Most of your premiums in the first 10 – 15 years are used to cover the death benefits and fees. It actually takes quite a while before you really enjoy the advantages of cash value accumulation.
Permanent policies are more suitable for those with estates or who are in the higher income brackets, rather than the average American.
There are 3 basic types of Permanent life insurance:
- Whole Life Insurance
- Universal Life Insurance
- Variable Life Insurance
Whole Life Insurance Options
Whole life insurance is the most expensive and rigid offering on the market. There are, however, a number of hybrid options.
Whole life is considered the most rigid type of Permanent life insurance, as the insured has few or no options when it comes to altering death benefits, premiums, or the cash value accumulation feature. Most policies simply lock you in for the duration.
If you think Whole life insurance is for you, please be sure to speak with an independent agent. They will be able to go through all the options with you in greater detail.
Here are the offerings available:
- Straight Whole Life – Also known as “Ordinary Life,” this policy type will provide coverage and is payable in full at age 100 with level premiums. The policy also provides cash value accumulation which grows over the life of the policy and should equal the death benefits at age 100.
- Level Premium Whole Life – Is the same type of policy as Straight Whole Life and is considered to be traditional Whole life insurance.
- Continuous Premium Whole Life – Same as Straight or Level Premium Whole life and simply means that the policyholder pays the same premium over the entire lifetime of the policy, which is generally to age 100.
- Limited Payment Whole Life – Provides the same type of policy as a straight, level premium or continuous Whole life policy, but the premiums are paid in a shorter time frame, such as 20 years.
- Single Premium Whole Life – Same type of policies as above but simply means that the policyholder pays a one time, all-inclusive premium.
- Whole Life Joint First to Die – A Whole life policy that is provided to two people, such as husband and wife, or two business partners. The policy will pay the death benefit when the first of the two policyholders die. Premiums are less expensive than for two separate policies (generally not available in the U.S.).
- Whole Life Joint Second to Die – Same as above, except the death benefit is only paid when both of the policyholders have died. This type of policy is often used for estate planning (available in the U.S.).
- Whole Life Survivor – Same type of policy as Whole Life Joint Second to Die.
- 7 Pay, 10 Pay, or 15 Pay Whole Life Insurance – These Whole life policies simply mean that you pay all your premiums in full as 7, 10 or 15 year annual premiums.
- Participating Whole Life – Where you are provided with a few select limited options regarding the investment portion.
- Non-Participating Whole Life – No options are provided.
Universal Life Insurance Options
Universal life insurance is part of the Permanent life insurance family of products. I happen to prefer it to Whole life because it’s more user friendly.
Universal life insurance is a type of flexible permanent life insurance offering the low-cost protection of term life insurance as well as a savings element (like whole life insurance), which is invested to provide a cash value build up. The death benefit, savings component and premiums can be reviewed and altered as a policyholder’s circumstances change. Unlike whole life insurance, universal life insurance allows the policyholder to use the interest from his accumulated savings to help pay premiums over time. Investopedia.
Universal life has the same components as whole life, with the exception that these policies may be much more flexible for the buyer in terms of:
- How premiums are paid
- The death benefits, and
- How the investment portion is managed
Universal life provides coverage for life and can be structured to act like a Term policy to age 95, 100, 105, or 120, essentially stripping away the cash value component and offering you the cheapest, long-term coverage available.
Like Whole life, there are also many hybrid forms of this product varying from insurer to insurer.
Here are the offerings available:
- Standard Universal Life – This is a less rigid version of a Whole life policy in that it allows you to adjust the premium payments or amount of death benefits over the life of the policy. The cash value accumulation portion will also reflect any changes made in the premiums or amount of death benefits.
- Indexed Universal Life – Similar to a Standard life insurance policy except the policyholder is given the option to invest the cash value accumulation portion of the policy into either a “fixed account” or an “index account.” An index account could be S&P 500 or Nasdaq 100, for example.
- Equity Universal Life – Same type of policy as an “Indexed Universal Life” policy.
- Guaranteed Universal Life – A Universal life insurance policy which allows you to select the amount of death benefits, the duration of the death benefit guarantee, and the length of time you desire to pay the premiums. It also allows you to build guaranteed cash value in the policy.
- Variable Universal Life – Also known as VUL, this type of policy is considered to be a combined form of both Universal and Variable life insurance policies. This type of policy allows for a portion of the premium used for the cash value accumulation portion to be invested in a variety of vehicles, such as bonds, stocks etc. Profits are non-taxable and can be used to pay premiums. These policies are regulated as securities and must be sold with a prospectus.
Once again, Universal life is a very complicated offering. Please be sure to contact an independent agent so they can go through all the details with you.
Variable Life Insurance Options
This is considered to be the most expensive type of all forms of Permanent life insurance:
- Variable Life Insurance – Variable life insurance policies provide permanent coverage to the policyholder, allowing them to allocate a portion of their premium to a separate account which consists of a variety of investment choices, such as stocks, bonds, equity funds, stock market funds, or bond funds. These policies are considered securities contracts, which are regulated under federal securities law, and are required to be offered with a prospectus.
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General Types of Life Insurance
There are a number of policies that cater to specialized circumstances that include:
- Online Life Insurance – This simply refers to any type of life insurance policy which can be purchased online. However, you have to be careful about the quotes provided because some life insurance online quote systems may only provide a limited number of insurers, which are select and more expensive.
- Mortgage Life Insurance – A policy used to cover a person’s mortgage. These policies are sold either by a lender where the lender is the named beneficiary, or can be purchased individually where the homeowner names the beneficiary. It is generally cheaper and more advantageous to buy the policy yourself. Policies are usually a Decreasing or Level Term policy.
- Advanced Market Life Insurance – This is a term used by life insurance agents to describe more complicated and high premium life insurance concepts for business and high-income individuals.
- Cash Value Life Insurance – Refers to Permanent life insurance policies, which not only provide the insured with death benefits but also have the added advantage of having a cash value accumulation portion which grows tax-free through the life of the policy. This benefit may be found in Whole Life, Universal, and Variable life policies.
- Income Replacement Life Insurance – Policies which are purchased for the sole purpose of income replacement should the primary breadwinner die. Most of these policies are Term life insurance, which provide death benefits only.
- Family Life Insurance – A policy, which can be either a Term or Permanent life insurance policy, and is intended to provide financial protection or a financial safety net for the welfare of the family. This ensures the surviving family members are able to maintain their standard of living.
- Pension Maximization Life Insurance – The purchase of a policy for retirement purposes and to maximize a person’s pension for when they retire. These policies consist of Permanent policies, such as Whole Life, Universal Life, and Variable Life. Generally, this policy is best purchased when a person is maxing out their IRA and/or 401(k) and is seeking an additional tax-deferred pension investment vehicle.
- Endowment Life Insurance – This is a form of life insurance contract set up to pay out a lump sum after a defined term (maturity) or when death occurs. Maturities can be either 10 or 20 years, or even a specific age. Some policies will also payout as a result of critical illness.
- Life Insurance as Alternative to Bequest – This simply means that a person names one or more charities to receive the proceeds of a life insurance policy when they die. This can be done in lieu of making a bequest to a charity through a will.
- Life Insurance for Estate Planning – Life insurance policies purchased for individuals with large estates. The proceeds of such policies provide immediate tax-free liquidity to the beneficiaries who can use the proceeds to pay federal and state estate taxes or other expenses.
- Life Insurance for an Irrevocable Life Insurance Trust– Also known as an ILIT, this simply means that the policyholder surrenders their policy to an entity, which acts as the trust for the policy. The trust is irrevocable, which means that it can never be changed. It allows you to set up the trust so you can determine how premiums are paid and how the trust later disperses the life insurance proceeds. Once the policy is assigned to the trust, though, you have no further control.
- Credit Shelter Trust Owned Life Insurance – This form of trust allows an investor who is married to shelter assets from estate tax. When the insured who owns the trust dies, the trust allocates the tax-free assets specified to the beneficiaries (usually the children of the person who set up the trust). The main benefit is that the surviving spouse continues to have rights to the assets in the trust and any additional income generated by the trust during their lifetime. This form of trust can also provide additional protection from capital gains tax.
- Life Insurance to Fund Special Needs Trust – Many parents have children with special needs. One way to look after your children should you pass away unexpectedly is to use a life insurance policy to continue providing them through a “Special Needs Trust.” This is important because any inheritance over $2,000 could exempt the child from Federal and State aid programs. A trust allows the legal entity to use the funds to provide ongoing support for transportation, education, rehabilitation, medical, and dental care not covered under a health plan. However, the funds must not be used for housing, food, cash, utilities, or property taxes, as this may be viewed as income.
No Medical Exam Life Insurance
No-exam life insurance is convenient but can cost as much as 3 times more than what you would pay for an equivalent Term policy which does require an exam.
Although you might be able to avoid having to take a medical exam, many insurers will require a brief phone questionnaire or might review the Medical or Rx database before they will approve your application.
Costs of some life policies soar if you try to buy it without a checkup. As when applying for bank loans, employment or any membership, purchasing life insurance requires the individual to meet certain requirements. Certain types of life insurance may require you have perfect health at the policy’s issuance to ensure you’re not trying to cash in on your imminent sickness or death. No Exam Insurance Realities, Jeff Rose, Nasdaq.
If you are pondering whether no exam or life insurance with an exam is best for you, if you are young and healthy, you should avoid the no exam policies, as they are best suited for those who need life insurance quickly to cover a business loan or have health issues.
The maximum amount of death benefits offered by insurers are generally much lower than what you could get for Term policies, although there is one insurer which offers no-medical benefits up to $1 million dollars. Typically, maximum death benefits range from $50,000 – $350,000.
There are also 9 variations of these policies, and they are best suited for specific circumstances and particular individual needs.
The types of life insurance policies that are referred to as no exam include:
- Simplified Issue Term Life Insurance – Provides Term insurance to the applicant with a variety of choices when it comes to choosing the length of the term and options. This policy does not require a medical exam, but does require the applicant provide responses to a medical questionnaire.
- Simplified Issue Universal Life (UL) – Similar to the above, except that in addition to providing the applicant death benefits, this type of policy also provides a cash value accumulation portion. It also requires that the applicant answer a medical questionnaire and does not necessitate a medical exam.
- Graded Benefit Whole Life – Also known as GBL insurance, this policy does not require a medical exam or questionnaire. It offers only limited benefits in the first 1-2 years and may take between 3-7 years to mature. Usually available for older people over age 45. The cash value accumulation generally does not equal the amount of death benefits, and premiums are more expensive than other equivalent standard life insurance policies.
- Rapid Decision Senior Whole Life – Usually available for older clients 50 years plus, this policy will only provide partial coverage in the first couple of years in which the insured must survive before the full policy comes into force. Policy amounts are generally much lower than other equivalent standard life insurance policies. Provides both death benefits along with a cash value accumulation portion which grows tax-free.
- Level Death Benefit Whole Life – This policy provides both death benefits and a cash value accumulation portion. Premiums are guaranteed to remain unchanged and the policy remains in force for the life of the policyholder so long as premiums are paid. Generally does not require a medical exam but a medical questionnaire is usually required.
- Guaranteed Issue or “GI” policies – A policy for people with serious health issues who would not be eligible for any other standard life insurance policies. Policies do not require a medical questionnaire and coverage amounts are much lower, ranging from approximately $5,000 – $25,000.
- Guaranteed Acceptance Life Insurance – Same as above.
- Instant Issue Life Insurance – Same as above.
- Burial or Funeral Expense Life Insurance – Essentially the same as Guaranteed Issue, but can also be sold as other forms of policies depending on the insurer.
These are all different types of no-exam policies and the cost and coverage can vary significantly.
Always discuss your needs and situation with an independent agent before you buy, as those companies which advertise on television or online are not especially clear about what they are selling.
Life Insurance for Business
Term and/or Permanent life insurance is often issued for business purposes.
The contributions of one person may be a good portion of the value in a company, so it’s very important to weigh this when considering business agreements or loans.
Different types of life insurance may be used solely for business purposes. This may apply to anyone involved in business when it comes to a person with:
- Sole proprietorship
- Business partners
- Small, medium, and large-sized corporations
- Any other type of business entity
So, let’s review some of the most common uses.
Business Life Insurance
A general, all-encompassing term that refers to any form of life insurance specifically used for any business purposes, which includes Term and/or Permanent policies.
Buy-Sell Life Insurance
This sort of policy is put into place for the purpose of business succession should one of the owners die.
There are 2 types:
- Cross-Purchase Plan – Each owner buys a policy on the other owner(s), and
- Entity Purchase or Stock Redemption Plan – Each owner enters into an agreement to sell their portion of the business back to the company upon death.
Key Person Life Insurance
When a company buys a life insurance policy on a person who is key or vital to the survival of the business, the company is the named beneficiary.
Executive Bonus Life Insurance
When an employer purchases a policy and pays the premium for a permanent life insurance policy, which is owned by a designated executive. This is a benefit of employment.
Split-Dollar Life Insurance
There are times when an employer/corporation purchases a Permanent policy with an employee/shareholder and enters into a contractual arrangement that lays out how premiums will be paid, hence the name, split-dollar life insurance. This agreement determines the manner in which the cash value and death benefits will be divided between the employer/company and the designated beneficiary of the employee/stockholder.
Group Life Insurance
Life insurance benefits are a great incentive to join a company. Group life insurance is used by business owners to cover employees or specific individuals. Coverage amounts tend to be lower and employees usually pay a premium to enjoy this feature. Portability is an issue, as employees cannot take their insurance with them when they leave or when they are terminated.
Employer or Corporation Owned Life Insurance
Life insurance that is purchased and owned by a business entity on the life of one or more of its employees, in which the company is the owner. The named beneficiary can be either the company or the employee’s named beneficiary.
Life Insurance for Small Business Loans
Many lenders require life insurance coverage when they set up a small business loan to defray the risk. These policies are usually purchased as 1, 5, or 10 Year Renewable Term policies.
Stranger Owned Life Insurance (STOLI)
This is the purchase and subsequent transfer of a life insurance policy that enables someone who does not have an insurable interest (such as investors) to profit from the insured’s death. In other words, the life insurance policy is purchased as an investment vehicle rather than to assist the beneficiaries of the policyholder.
Guaranteed Issue Life Insurance
For individuals with severe medical conditions who have been declined for life insurance.
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What’s the Right Type of Life Insurance for You?
There are many types of life insurance, so selecting the policy that’s best for you really depends on how you live your life.
When a client contacts us, we take the time to go through their financial circumstances.
How old are they and do they have young children? Do they have a lot of debt or a big estate? All of these details affect the final outcome.
We’ve got a great calculator to help you figure out your needs: Click Here.
Whole Life Insurance Is Not an “Investment”
If you are risk-averse and would like a policy that covers you for life, Permanent insurance MAY be for you.
As mentioned above, I do not advocate purchasing life insurance for investment purposes. That being said, there are circumstances where Permanent insurance is beneficial.
If you’re a veteran, you might be tempted to buy VGLI, maybe it isn’t best.
I’ve listed some of the instances where I feel Permanent insurance would be suitable:
Permanent Insurance: Exceptions to the Rule
- Nominal “final expense” life insurance policies, which usually provide about $5,000 – $20,000 to cover burial expenses. These policies are typically Whole life.
- Tax shelter investment opportunities because you maxed out your contributions to your 401(K) and IRA.
- You have a large estate and want to ensure your heirs have immediate cash to cover estate taxes.
- Individuals with high-risk medical conditions – Whole life insurance may be their only option. “Guaranteed issue” policies are built on a Whole life chassis.
- For people who are exercising Whole life conversions, because no other options are available due to medical circumstances. These Whole life policies aren’t purchased as an investment vehicle.
- If you are a business owner or a wealthy individual looking for benefits, such as asset protection, hassle-free set up of deferred compensation, or supplemental executive retirement plans, and return on investment and risk aren’t a factor.
Term Insurance Is Right for Most People, Most of the Time
Yep, you heard me right. Term insurance works for the majority of people. In my humble opinion, it’s almost always best to purchase a Term policy and invest the money saved in a vehicle that will generate better returns.
Term insurance is extraordinarily flexible and you can almost always find a policy that will suit your individual circumstances.
You can ever layer policies to fit times when you need more or less coverage. In essence, you would purchase a number of different policies to cover different circumstances that would drop off as you cease to need them.
Your life insurance needs will lessen as you grow older. The most pressing time is when your children are young and you are in the prime of your career.
Laddering shorter-term policies not only is a good way to bulk up coverage during key times of your life, but it also saves on premiums, says Greg Sanders, founder of Peachtree Insurance Advisors in Marietta, Georgia. Bankrate, Climb a Life Insurance Ladder and Save.
What If I Change My Mind and Want a Permanent Policy?
All of the Term insurance products we carry at Huntley Wealth have a conversion option. So, should you decide that Permanent insurance better suits your needs, the option is there for you to swap out your coverage.
Be sure to consult an independent life insurance agent before you make any big decisions. They can go through all of your options to find the life insurance that meets the needs of you and your family.