Types of life insurance coverage

The type of life insurance you should buy depends on the reason you need life insurance coverage in the first place. Here are the best plans for common financial needs.

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Amanda Shih

Amanda Shih

Licensed Insurance Expert

Amanda Shih is an insurance editor and licensed Life, Health, and Disability agent at Policygenius in New York City. Her work has appeared in Slate, Lifehacker, Jetty, and J.D. Power.

Published May 6, 2021|3 min read

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You know buying life insurance protects your family financially. But a new parent buying a policy to support their growing family has very different needs than a retiree making end-of-life plans. 

Often, term life insurance is the most affordable and simplest choice, but everyone’s financial needs are different. We looked at common reasons people buy life insurance and which types of life insurance coverage are best for achieving those goals.

Key Takeaways

  • Term life insurance is best for paying off debts, replacing your income, and saving for the future

  • Permanent life insurance may be good for high-income earners who want to build more tax-deferred wealth

  • Non-traditional policies, like final expense insurance, can pay for end-of-life expenses and cover those with serious medical conditions

Life insurance for family financial support 

Buying life insurance to support your family—whether that family includes a spouse, children, your parents, or some combination of the three—provides for a few main needs: 

  • Income replacement: For everyday and long-term expenses and new expenses, like childcare or house cleaning

  • Covering debts: To continue paying down shared debts, like a mortgage or cosigned private loans

  • Future planning: Saving for education costs or establishing a nest egg for your children

We recommend: Term life insurance 

Term life lasts for a limited period (usually 10-30 years) and expires or can be easily canceled once you no longer need it. Term policies offer the lowest premiums—if you’re in your 30s, you’ll pay $20-30 for a $500,000, 20-year policy—so you’ll be able to fulfill your family’s needs at a low overall cost. 

→ Learn more about buying life insurance for your family

Life insurance for children

It usually doesn’t make sense to buy an individual life insurance policy for your child, since the policies are costly and most children don’t make an income that needs to be replaced. The best way to protect your child financially is to have your own life insurance policy. There are two exceptions:

  • If your child has or is at risk of developing a medical condition that would make it difficult for them to qualify for life insurance as an adult, buying them a policy while they’re young will secure them lifelong insurance protection.

  • If the unthinkable happens and you wouldn’t be able to afford a funeral for your child, you can add a child rider to your own policy that provides a small payout if any of your children die. The rider is less complex and much more affordable than a separate life insurance policy for your children.

→ Learn more about buying life insurance to protect your children

Life insurance for end-of-life expenses 

As you get older you’ll likely have fewer dependents and debts, but you may not have enough saved to pay for end-of-life expenses like:

  • Final medical expenses: Out-of-pocket medical costs can be $9,000 or more in the last year of life, [1] depending on your health insurance

  • Funeral costs: The average funeral costs $8,000-10,000.

  • Long-term care: Programs like Medicare may pick up some of the bills, but a private room in a nursing home can cost $105,850 per year. [2]

We recommend: Final expense insurance

If you’re a senior or approaching retirement age, it’s possible that term life insurance won’t fit your needs due to the higher coverage options or term limits. Final expense offers lifetime coverage in small amounts—$40,000 or less. 

Premiums are high (five to 15 times more than term life) but the application doesn’t require a medical exam, making it easier for older people with complex health conditions to buy coverage.

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Life insurance for building wealth

If you’re a high-income earner who wants to support your family after you die and maximize your net worth while you’re alive, you may benefit from using life insurance to grow your savings. This applies to people who regularly max out their other tax-advantaged investment accounts and can afford to pay higher premiums.

We recommend: Permanent life insurance

Permanent insurance plans come with lifetime coverage and an investment-like feature called the cash value that earns interest over time. They’re often used to:

  • Grow tax-deferred retirement savings using the cash value, which earns interest at a rate set by your provider or based on market performance.

  • Cover estate taxes for heirs by placing the policy in an irrevocable trust.

  • Increase the inheritance you pass on by adding cash value earnings to your death benefit (only available on some policies with flexible or increasing benefits).

Whole life insurance is the most common cash value policy. The cash grows at a fixed rate controlled by your insurer. Other types of cash value insurance, like universal and variable life, come with riskier and more complex investment options but higher potential for gains.

It’s important to work with a financial professional if life insurance is part of your estate or retirement plan so you can make informed investment choices.

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Life insurance for complex health histories

Having serious health issues means life insurance may be an even higher priority, but some medical conditions make it harder to buy traditional life insurance. Non-traditional alternatives may have higher premiums and lower coverage limits, but are worth considering if you can’t get a traditional policy.

We recommend: 

  • Group life insurance: Rarely requires health information for approval, but coverage maxes out at $50,000 or two to three times your salary and you lose the policy if you change jobs.

  • Guaranteed issue life insurance: A type of final expense insurance with near-guaranteed approval that offers up to $25,000 in coverage for people age 50 and older.

  • Joint life insurance: Permanent insurance that covers two people under one policy that can help you get covered if your spouse qualifies.

  • Spousal insurance: Some insurers offer coverage for a non-working spouse if the breadwinner is uninsurable, but restrictions may apply.

If you support someone with an illness, whole life insurance is a good way to ensure they or their loved ones have financial support after you pass away. 

Every person’s life insurance needs are different, but finding a policy for your goals doesn’t have to be. An independent insurance agent can help you compare policies and find the right coverage for your circumstances.

Types of life insurance coverage FAQ:

What are the different types of life insurance coverage?

Life insurance coverage is intended as an income replacement, but can also be used to build tax-deferred savings and cover end-of-life expenses.

What type of life insurance policy fits my coverage needs?

Most people only need term life insurance to provide for burial and medical costs, daily expenses, debts, and savings. Permanent policies may be good for investors or those with complex health concerns.

How do I find out what type of life insurance coverage I need?

Speaking to an independent insurance agent or certified financial planner is the best way to discuss your needs and compare a wide array of policy options.

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