How to Choose the Right Life Insurance for Your Needs

When you pass away, your life insurance policy pays a “death benefit” to whomever you name as the beneficiary (assuming the policy is in force and all required premiums have been paid). This is cash that your loved ones can use however they need it. For example, beneficiaries may use the proceeds to help pay for funeral costs, estate taxes, a home mortgage, education costs or ongoing living expenses. Alternatively, you may opt to have the death benefit go to a charity of your choosing, such as your alma mater or a nonprofit organization. 

The primary types of life insurance are term and permanent.

Term: With term insurance, you pay premiums for a set period of time—typically 10 to 30 years—in exchange for a predetermined amount of money that goes to your beneficiaries if you die during that period. Most workplace plans are term coverage. It is typically the most affordable type of life insurance, but when the period is over, the policy no longer has any value. Taking out an additional individual term policy may make sense if you have a temporary need for increased coverage: For example, when taking on debt, such as a mortgage, a term policy that matches the term of the loan may help to assure that it would be repaid in the event of your death.

Permanent: With permanent life insurance, the plan never expires as long as you continue making the required minimum premium payments. Your premiums go toward two types of benefits: the first is the death benefit that is paid to your beneficiaries upon your death, and the second is the plan’s savings component, known as a “cash value,” which is invested and may grow tax-deferred in the policy’s account. You may be able to borrow against this cash value or even withdraw a certain amount in some situations, such as for your child’s educational expenses, while you’re still living, without triggering tax consequences. For retirees, this feature can serve as an extra financial backstop against emergency expenses. 

Whether you choose term or permanent coverage, the amount you’ll pay in premiums will likely depend on a variety of factors, including your age, gender, medical history, tobacco use, occupation and lifestyle.

For some people, workplace plans may not be sufficient. Though such policies provide some level of income protection, the coverage is generally capped around two times your salary, leaving the potential for gaps. Plus, workplace plans are often tied to your employment, so if you leave your job or retire, you could lose access to that coverage. With an individual life insurance policy, either term or permanent, you can expand and customize your coverage to best fit your financial needs at different stages of life. 

You may want to consider a life insurance policy with an optional long-term care rider. This allows your beneficiaries to tap into the benefits they would have received upon your death to help pay daily expenses for long-term care services you may need while still alive, such as nursing home care or health aides. Opting for this feature may be prudent, as the cost of long-term care services may not be covered under major medical plans or Medicare and may exceed what you are able to pay from income and other sources, particularly in retirement, when long-term care is typically needed. A Morgan Stanley Financial Advisor can help calculate what you potentially need to pay for long-term care.