When it comes to life insurance, one of the most critical decisions you need to make, financially, is in deciding the type of policy to purchase. Whether you want coverage to ensure that, after you die, your family has a place to live, your children can afford college, or simply that your spouse will be able to afford end-of-life costs for you, several life insurance products may appear to fit the bill, each appearing to be similar in their benefits, even if they vary widely in cost.
Here are some pairs of such seeming siblings, with advice on which is likely the better choice for you.
Mortgage vs term insurance
While you generally don’t need life insurance to obtain a mortgage, many people choose to purchase a policy in order to ensure that their spouse or family can retain ownership of their house should they die. To capitalize on this desire, when you purchase a home, many banks and lenders will provide the option of purchasing mortgage life insurance (also called mortgage protection insurance). Though mortgage life insurance policies are structured in a variety of ways, they’re relatively similar to term life insurance policies, with a few key differences that often make them the worse choice.
Most critically, many mortgage life insurance policies will pay out only in the event of accidental death. That means the policy would not pay out were you to die due to disease, as the majority of people do. In addition, mortgage policies typically assign your mortgage lender as the beneficiary, meaning that financial institution would get the entire payout were you to die. You would have to purchase a separate life insurance policy were there expenses other than paying your mortgage that you’d like to be insured.
Another drawback to mortgage life insurance is that, should your financial situation change and you no longer want coverage, you may not be able to cancel your policy, since it’s tied to your debt. Finally, a mortgage life insurance policy is generally more expensive than one of the term variety.
No exam vs fully underwritten policies
The term no-exam life insurance, also known as simplified issue insurance, refers to any life insurance policy that doesn’t require you to take a physical before you buy it. No-exam policies are unquestionably convenient--you don’t have to be examined by a doctor or nurse, you’re more likely to be accepted as an applicant, and you can get immediate approval and purchase the policy online. The downsides to simplified issue life insurance are that you may not have the same policy options and you will always pay more for the same coverage. (A case in point: the fact that mortgage life insurance policies are of the simplified type contributes to their generally pricier premiums.)
When an insurer knows less about your physical health, they will assume the worst in order to restrict their risk. And, while a no medical exam policy may still require you to complete dozens of questions about your health and medical history, insurers prefer to verify this information as thoroughly as possible. Given that medical exams take less than an hour to complete, and can often be scheduled to take place at your home or work, you might pay hundreds of dollars more per year over the course of a decade and simply avoid a short physical. Unless you don’t believe you would be approved for coverage due to the results of a medical exam, a fully underwritten policy is likely the better choice.
Group vs individual
Group life insurance can be offered by employers, the military, and organizations as a benefit, with employers often providing a certain amount of coverage for free. While you should always take advantage of free life insurance, the payout is likely limited to no more than $50,000. If this amount is insufficient, should you buy supplementary group coverage or an individual life insurance policy?
For the most part, the answer depends on your age and health. Young people who are in good health should almost certainly buy individual policies, which typically cost significantly less and offer a wider variety of coverage options. In addition, you needn’t be concerned about losing your life insurance coverage should you change employers.
If, on the other hand you’re not in great health, or are fairly old, opting to expand your group insurance may make sense. However, you should still obtain quotes for individual life insurance coverage, then compare those to what you’d pay through group life insurance. One caveat, though: Where your premiums may be stable for an individual life insurance policy, depending on the type you choose, rates typically increase over time with group coverage, so use the average cost over a number of years in your comparison of the two options.