The Best Type of Life Insurance Reviewed
So, now to the real question –what’s the best type of lfe insurance?
Recall that we actually stated this earlier: the best policy is the cheapest policy over the timeframe that we need the insurance for.
Putting all this together, we now have that if you need life insurance for 10 years, then the best type of life insurance is 10 year term. If you need life insurance for 20 years, then 20 year term is the best type of life insurance. If you need life insurance for 30 years, 30 year term is the best. And if you need life insurance until you die, then guaranteed Whole Life or Universal Life Insurance with Term 100 insurance costs are the best types.
Lets drive that point home with a couple of counter examples. If you need life insurance for 30 years, and you purchase a whole life,you’re overpaying the costs of insurance (because whole life is more expensive than term in the early years). Just take the 30 year term and save your money. However if you need life insurance forever and you purchase a 30 year term you’ve got a problem in 30 years – when the term is over the premiums are going to go through the roof and become unaffordable; and term insurance will eventually expire leaving you without life insurance at all.
Lets return to our 5 scenarios again so we can match up these types to our individual situation:
- Dual income with dependents (i.e family)
- Dual income no dependents
- Stay at home parents
- Mortgage Life Insurance
- Final expense
Now that we understand the choices of life insurance types, and we know our timeframe from when we figured out how much insurance we need, the specific answer to the best type of life insurance is surprisingly brief.
Dual Income with Dependents
Recall that in the ‘how much’ insurance section we made assumptions that we needed the life insurance until either the kids are out of the house and financially independent, or until retirement. We matched our how-much calculation to how long we needed a replacement paycheque. Well, that timeframe also tells us how long we need the insurance for, and thus the best type. If you’re 30 years old and looking at needing your income replaced until you’re about 60-65, then a 30 year term is the most appropriate type of life insurance.
If you’re 45’ish and looking to cover until the kids are out of the house and/or roughly age 65, then a 20 year term is appropriate.
In all of these cases, you’re looking at matching a term life insurance policy with a term that best matches how long you need the insurance for. As a further point, remember that you’re also saying that ‘at the end of the term, I don’t need life insurance anymore and therefore will cancel it’. Probably the most common policy for this scenario is 20 year term.
You should also read the Layering section below for some variations.
Dual Income with no Dependents
This scenario is very similiar to the dual income with dependents, in that most people assume they need coverage only during their income earning years. Thus, a term that closely matches the number of years until retirement is the most appropriate.
Stay at Home Parents
Similiar to the Dual Income With Dependents, most people assume that they need to provide insurance coverage for their dependents roughly until retirement or until the kids are no longer financially dependent. That gives us a defined timeframe – which leads to term insurance being the appropriate choice. Again, choose a term life insurance policy that matches roughly with that timeframe.
Mortgage Life Insurance
Mortgage life insurance is perhaps the clearest application of term life insurance. Mortgages have a specific duration (the amortization period) after which point the mortgage is paid off and insurance is no longer required. A term life insurance policy that closely matches how long you will have a mortgage for is thus an appropriate choice.
Just be aware that many people move to different houses or refinance, thus extending their mortgage. So you may be paying for a mortgage longer than the current amortization period of your mortgage.
Final expense needs happen when we die – no matter when that is. Thus you should be looking at a permanent insurance policy (guaranteed whole life, or a minimum premium universal life with term 100 insurance costs). These choices ensure that your premiums remain level for your entire lifetime and that the policy won’t expire while you’re still alive – two problems you’d find with term insurance.