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A Millennial’s Guide to Life Insurance Part 2: What Type of Life Insurance is Best

Shutterstock_262997165We’ve gotten through why life insurance is probably more necessary than we think, but here’s where things get a little more complicated. Like everything else in life, life insurance policies come in a variety of shapes and sizes. For someone like me, who isn’t exactly financially literate, it’s hard to keep them all straight. But after reading and re-reading a host of articles on the subject, I think I can break it down for you. [1]

1.) Whole Life

Whole life insurance is one of the two permanent life insurance options I’ll be discussing. As you’ve probably guessed, a permanent life insurance policy does not expire until you do, or until you cancel your policy. You can also expect to pay a very high premium, but there’s a reason for this.

With a whole life policy, the amount you pay each month goes to two different places:

  • Part of it is used to cover the cost of your policy.
  • The other part is placed into a savings account, typically with decent interest rates.

With whole life you have the face value of your account (what your beneficiary will receive) and the cash value (the amount of money accumulated in the savings account). With a whole life policy you can take out a loan with the insurance company and use your cash savings as collateral. Since you’ve accumulated cash value, the loan is very low risk and will often offer lower interests rates than you’d find elsewhere. Also, if you decide to cancel your policy, you will receive the entire cash value of your policy.

2.) Universal Life

The basics of universal life are pretty similar to whole life, but with an additional amount of flexibility. Like whole life, it is a permanent policy and a portion of the premium increases the cash value of the policy. You may take a loan out against your cash value, and will receive it in full if you cancel.

 Some of the distinctive features of universal life include:

  1. It is possible to increase or decrease the face value (death benefit) of your policy.
  2. Your cash savings account can be a part of an investment portfolio.
  3. The amount you pay each month is very flexible.

Unlike whole life, which places a fixed amount of money in your cash value account, with universal life, you decide how much you put in your cash account after paying the cost of the policy.  This means that if you’re strapped for cash one month, you can pay a smaller premium. Conversely if you have some excess cash, you can choose to pay high premiums now, building up cash value, and eventually use the cash account to take out loans, or even pay your monthly premiums.

As for me, who couldn’t save unless tricked into it, the cash value of my policy would probably increase faster with whole life’s fixed premiums.

3.) Term Life

Term life insurance has the awesome advantage of being way cheaper than other types of life insurance. However, it does have its drawbacks as well.   To start off, it doesn’t include any of the bells and whistles other policies offer, and it’s temporary. Insurance companies offer a diversity of term lengths (10, 20, 30, 40 years), and your premium will stay the same from the moment you get the policy until the term is up. The issue with this, though, is that once your term is up you will lose all you coverage and have to take out a new policy from scratch. Of course, we age along with our policies, so when applying for a new policy you can expect to see a major hike in premium costs. Just the icing on the cake you needed, right?

But, there is an advantage to term life as well. Many term life policies include a conversion clause which will let you convert your term policy into one of the permanent policies outline below. This can be a good option, but you’ll have to be careful because many policies will not let you convert after a certain amount of time.

4.) Group Life

For those recently or even semi-recently out of college, finding a job that includes benefits can be a pretty difficult task. But if you are one of the lucky few, you’ll likely have access to a group life insurance plan. This type of policy is pretty different in that you are not the actual owner of the policy, but rather your employer or union will offer you a plan as a part of your overall benefits package. These are typically term life policies that renew every year.

A great advantage is that your employer pays for some if not all of the premium costs, so you will be paying considerably less each month. However, since your employer is the policy holder rather than you, you have less control over the plan you are given. The face value of these policies will often cover one or two times your salary. Should you leave your company, you can cancel your policy or in some case, you’ll be able to convert your policy into an individual plan.

Where Do I Go From Here?

Here’s the thing: after researching life insurance and giving you guys some insight on it, I’m still not sure if I’m actually going to take out a policy. But in the process I realized something that was pretty shocking: even at my age and in my financial situation, life insurance is an option that I should be taking seriously. One of the most liberating and terrifying things about being in my 20’s is that I am going to be in a completely different place in my life in 10-20 years. By the time I’m 33 I may have bought a house or gotten married. If I take out a 20 year term life policy out now, I’m covered for any of those life changes that seem so irrelevant now, but may be an option in the not too distant future.

Bottom line, life for us is constantly in flux, and paying an extra $20 a month to have stability in the midst of all these changes may be something to consider. I know I have. 

If you missed Part 1 of our guide, be sure to check it out. 


[1] Please note that this is a general overview of different types of life insurance policies and their features. Different policies will have difference features, exclusions, etc. So before purchasing a policy, carefully review the terms to make sure you are getting what you want out of it. For the record, I'm not a licensed agent. Definitely call one and discuss your specific situation with them. 


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