For folks unfamiliar with life insurance, the material that involves purchasing a policy can be unsettling. You have to put an enormous amount of trust in your insurance broker/agent. And then hope they have your best interests up front and center. Unfortunately, if a broker/agent has bad intentions, most clients will not find out about it until after the fact.
Life Choice Advisors always recommends that our clients do their own research before committing to a decision.
Life Insurance Types
There are three main types of life insurance. These types are Term Life, Whole Life and Universal Life Insurance. Within these policy types, exists additional options and variations. However, most policies are some form of one of these three basic types.
There are advantages for each kind, but everyone is in different circumstances. Having a complete understanding of the ‘good’ and ‘bad’ of each is extremely important. Using a trusted broker to help you navigate through the options can be very helpful.
Below is a brief summary of the differences, along with the advantages and disadvantages of each type.
Term Life Insurance
Term life insurance is usually the cheapest option to pay on a monthly basis. However term life has no cash value. The low cost makes it popular, on the other hand if you outlive the term the policy expires. If the insured dies during the term of coverage the beneficiary(s) will collect the death benefit.
Term life insurance works for a “term” of time. Common terms are 10, 20, or 30 years. Some insurance carriers also sell term insurance that will cancel at a particular age, like age 80 or 85. Term life insurance to a certain age will usually increase its rates every year. Eventually becoming too expensive to keep.
A term life policy commonly has a level payment, meaning the premium amount stays the same each month or year. Typically the owner has several options to pay; monthly, quarterly, semi-annually and yearly.
A key point to keep in mind is – An insurance company has mortality tables and statistics to draw from and sets its rates accordingly. Moreover, there is an expectation that its policy owners will outlive the term coverage.
Whole Life Insurance
Whole life insurance is permanent and is designed to last for the insured’s “whole life”. It has a level premium (the payments do not change) and will accumulate a cash value through time. In some cases, a whole life policy may earn dividends from the insurance carrier. This also makes whole life insurance a form of investment.
Within this type of policy the cash value increases at a particular % rate. And (if applicable) a dividend will help increase the speed at which the value can grow.
Whole life insurance also provides the ability to borrow from the cash value in the form of a loan. A loan can be used for any purpose and the owner of the policy has the choice to pay the loan back or not. However, the insurance company will charge interest on the loan annually and the death benefit will be less the unpaid loan balance when you die.
The insured will never outlive a whole life policy. As a result (tax-free death benefits also) whole life insurance is regularly used for final expenses, generational trusts and estate planning.
Universal Life Insurance
Universal life is another permanent choice of insurance. The main difference with universal life is that it has a flexible payment. In other words, the payment can change over time.
Universal life policies have cash value accounts. Insurance charges come out of this cash value account. In the monthly premium payment, any amount above the cost of insurance stays in the cash value account. This cash value will grow based on the insurance carrier’s performance and has a confirmed minimum growth rate.
The cost of insurance will increase (with the insureds age) over time with this type of policy. As rates go up over the years, the growth in cash value will hopefully make up for the increasing payments.
Loans and withdrawals are features of these policies along with the ability to surrender the policy for the cash value. Keep in mind surrender charges (a fee if you withdrawal money or cancel the policy) may apply.
Variable Universal Life Insurance
Similarly, another form of universal life is called variable universal life insurance. The difference being that these policies have a cash value account that does not give a fixed return. This “cash” is put in variable “accounts” with diverse asset classes included in the life policy. In the end, the market dictates the performance of the cash value.
The benefit of this type of policy is that generally speaking, the market has outperformed the fixed return of universal life. On the flip side, what if the market falls, you would take on that risk.
Variable universal life insurance has provisions for loans and the policy may be surrendered at any point. Again, charges may apply for early cancellations or withdrawals from the policy.
The right policy for you
Different types of life insurance can be appropriate. It depends upon a person’s needs, age and goals for the policy. Each type of policy has its pros and cons.
Questions to ask when considering a policy:
- permanent or temporary coverage
- will the death benefit amount accomplish my goals
- what is the cost over time
In conclusion, whichever insurance you choose, it is essential to know the guidelines of each kind. We recommend a no obligation ‘needs assessment’ with one of our brokers to assist families with their options.