Not long after I started college, I started looking into life insurance. I was concerned with regards to the student loans I was taking out and did not want to burden my family with debt if something were to happen to me.

Unfortunately, I did not fully understand life insurance and all the different options. Flash forward 4 years, a wedding and two houses later, I kind of had forgotten about my original policy. With all these life changes it was certainly time to re-evaluate my coverage.

Term Life

With term life insurance you only have life insurance for a specific period of time. The most common coverage lengths are 10, 20, or 30 years. You get to choose the length when you sign up for your policy. Premiums remain the same throughout the entire term.

The idea with term life insurance is that it protects your dependants in the event you die prematurely. Ideally your family’s needs for insurance would end when your term life insurance policy expires – your kids will be on their own, you will have paid off your mortgage, and you’ll have healthy saving and investment accounts.

However, not all term life insurance policies are the same, and when comparing coverages and costs, you want to make sure you are comparing policies that are similar. Some term life policies offer return of premiums, which means that if your term were to expire while you are still alive, you would be able to get the amount you paid in premiums back. Make sure you read the fine print of your policy, as there are certain steps and deadlines you have to follow to qualify for return of premiums. Return of premium policies tend to be more expensive and may require a physical compared to non-return of premium life insurance policies.

Another thing to be aware of when comparing different term life insurance policies, is that some policies have the option to convert into a whole life policy at the end of your term. For the original term policy, your premiums will remain the same, but if you end up converting to a whole life policy, your premiums will become variable and continue to increase as you age.

If you need to cancel a term life insurance policy, be sure to read the fine print of your policy. You most likely will forfeit any money you have paid into it, however some term policies have a “cash value” attached to each year you have paid premiums. The cash value will be quite a bit less than the premium amount you have paid into it, but if you were to request the cash value option upon termination, that money is subject to taxation.

Another option is to sell your policy. To sell a term policy, it must a policy that is able to be converted to whole life. Basically you would receive a cash settlement and the buyer would take over your premiums and would collect the death benefit when you die. You may be able to receive between 25-50% of the death benefit as a cash settlement, but most buyers have a minimum age for you to qualify. The older you are, the more valuable the policy is to the buyer. The gains you receive are also subject to taxation and can be quite complicated so make sure you consult the appropriate tax professionals before choosing this option.

Whole Life

Whole life insurance gives you life-long coverage. Because you are paying for coverage until you die, your premiums will be quite a bit higher than term life insurance, as a death benefit is guaranteed. However, one of the pros of having a whole life policy compared to converting a term life policy into whole life policy is that your premiums will remain the same as long as you live.

Whole life insurance incorporates an investment component as well. The cash value grows at a guaranteed rate and you won’t need to pay taxes on the gains while they are accumulating. You can also borrow money against your account, however if you don’t repay the policy loan with interest you could end up reducing your death benefit. Upon your death, your dependants will receive your death benefit minus any loans plus any interest accumulated that was borrowed against the policy.

Some whole life policies can also earn annual dividends, which the insurer pays to the insured from profits. You can be paid out these dividends, leave them to earn interest, use them to decrease your premium, repay policy loans you took out, or buy additional coverage. Since dividends are based on the financial success of the company, dividends are not guaranteed.

If you want to cancel a whole life policy, you can surrender your policy for its cash value as well. Or you could sell your policy as mentioned above in the term life insurance section. You will be subject to taxation, so make sure you understand your obligations by consulting a qualified tax professional.

Keep in mind that once you cancel any policy, you no longer have coverage. If you decide to insure yourself at a later date, the older you are, the higher your premiums will be. For example, if you were to sign up for a $300,000 for 30 years at age 20, your premium might be $23.67 per month for 30 years. You might decide to cancel your policy at age 24 because you no longer have student loans and do not currently have a mortgage. Flash forward to age 32, you are now married, have a mortgage, and two little kids. You decide that you need life insurance. You want the same coverage you had previously, but it’s now going to cost you $35.45 per month for 30 years. The older you are when you apply for life insurance, the more expensive your premiums will be.

Mortgage Protection Life Insurance & Other Loan Specific Life Insurance

Oftentimes after you purchase a house you are solicited with mail urging you to buy mortgage protection insurance (MPI). MPI is similar to other types of term life insurance in that you buy a policy, pay regular premiums, and at the end of the policy term, it ends. If you die during the term of the policy, a death benefit is paid out.

MPI, however, has quite a few key differences compared to general term life insurance. The mortgage lender is the beneficiary in this instance. The death benefit goes directly towards paying off your mortgage. Because MPI goes towards paying of your mortgage, it usually has a decreasing death benefit. That means your death benefit decreases as you pay off your mortgage, compared to term life insurance where your death benefit is constant. While term life insurance terms are mostly flexible, MPI terms are usually locked into the length of your mortgage. Depending on your age, you may only be eligible for certain terms as well.

Some newer MPI policies do offer fixed premiums and a level death benefit, where the difference between what is owed on the mortgage and the death benefit is paid out to your benificiary. The lender would only receive what is needed to pay off the mortgage. There are some MPI policies that offer a return of premiums if you never file a claim after you pay off your mortgage, while others that allow you to convert your MPI into a life insurance policy if you pay off your mortgage while your policy is still in effect.

The main drawback to MPI or insurance specific to certain loans is their narrow scope. While your mortgage will be paid, if you don’t have additional life insurance coverage, other debts and bills will not be covered. MPI policies are also usually more expensive than term policies and are less flexible (limited term options, fluctuating premiums, and the decreasing death benefit); however those that may benefit from MPI would be those who don’t qualify for term life insurance because of poor health, advanced age, or limited outstanding loans.

MPI is not to be confused with private mortgage insurance (PMI). PMI is a type of mortgage insurance you may be required to pay for if you have a conventional loan on your home and have put less than 20% towards the down payment. PMI protects the lender, not you, in the event you default on your mortgage.

Lastly, make sure to thoroughly research your options when shopping for life insurance and that you are comparing comparable products. There is no “one right answer” and everyone’s needs are different. Some things to consider when determining how much life insurance you will need to apply for would be: lost income due to death, lost wages of significant other due to bereavement, childcare, mortgage, other outstanding loan balances, and any other additional expenditures you would want to be covered in the event of your death.