All life insurance policies are not the same. There are different policies that have been designed for different goals and objectives. Some of been designed to run your whole life. Some have been designed to run for a short period of time. Some have been designed to have cash value and others don’t. Some policies have money that is invested in the stock market and are subject to loss while others are guaranteed. The choice is up to you and your decisions should be based on the purpose of the insurance and what you can afford.
Life insurance policies will typically fall into two main categories; term insurance and cash value insurance. Term insurance is less expensive at the beginning. It has no cash value and lasts a certain “term” period. Cash value policies are more expensive at the beginning but can build up cash value that you can use later on to help pay for the policy premiums. Some company’s have both term and cash value combined on the same policy. Lets take a closer look at each.
Term life Insurance
Term insurance offers a guaranteed death benefit for a guaranteed period of time, or “Term”. This is the cheapest option to purchase insurance and to also provide security for your loved ones. You pay premiums on the policy for the set period of time. As long as you continue to pay your premiums you are guaranteed coverage. If you pass away during the term period your beneficiaries receive the death benefit.
Term life insurance policies can be as short as 1year and as long as 40 years. The shorter the guaranteed term period the less expensive the premiums.
The most common term policies are:
10 Year Term
15 Year Term
20 Year Term
30 Year Term
Pros: Very affordable - term policies are the least expensive life insurance and also have the lowest costs of insurance.
Cons: Length of Coverage - these policies will eventually expire. If you would like a policy that will run the rest of your life than you should look at permanent policies.
Best for: People who are looking for a large amount of insurance for a short period of time. This includes the largest portion of life insurance shoppers. People use term life insurance to cover:
Mortgages - insuring the loan will be paid off if the borrow passes away during the length of the mortgage.
Income Replacement - if you have people that depend upon your income to live then term insurance will cover this situation. Examples would be: children while they are in the home, dependent parents that live with you now, stay-at-home spouses so they can be covered while the kids are still at home.
Short Term Loans - Construction loans or business loans that need to be covered until you pay the loan back.
Not good for: People who are looking for long term coverage should look towards a more permeant option. Term policies are not good for:
Estate Planning and Trust Funding - these strategies usually use permeant policies
Special Needs Children - Special needs children usually will need income replacement for the rest of their lives. They will not grow up and live on their own. Permanent insurance is there until you die.
Frequently Asked Questions
Can I renew my term policy when the term period runs out? Most Term policies are guaranteed renewable but at a very high rate. It doesn’t make any sense to renew a term policy unless you have a few months to live when the policy runs out. For example, we have a client that is a 49 year old female and is paying $336 per year for a 30 year term policy. At the end of the thirty years she is guaranteed renewal at $8,522 per year. This might be something she would want to do if she will be passing away soon.
How can I extend a term if I cant renew the policy at the end? Most companies have conversion options on their term policies. This means the policy can be traded for a new permanent policy even if you are unhealthy. Every policy is different and every company is different but some common privelages to convert are:
You can convert to a permanent policy that can run the rest of your life.
You might not need to prove insurability. Meaning no underwriting and you can keep the same rating.
The age on the policy is your new age but you are at least able to run the policy the rest of your life.
When looking at term policies ask your agent what the options are to convert your policy. You might not need it but it is good to have just in case.
Some companies will offer Living Benefits on Term life insurance. Living Benefits can give you access to your face amount while you are still living if you have a qualified illness. It can also allow access to your face amount if you need assisted living or long term skilled nursing care.
Cash Value Insurance
Cash value life insurance is a type of insurance where the premiums are higher than their term counterpart for the same death benefit. Cash value life insurance is also referred to as permanent life insurance. Part of the premium will pay for the cost of insurance and the left over amount will go into a cash value account. As you pay premiums more and more of the excess money will be added to your account. This account will have some sort of interest rate. Your money in your account value will grow faster as it earns interest.
You can take loans out against your cash value which may be a lower interest rate then you can get from a bank. You can use that money to help supplement your retirement, buy a car or pay for a child’s or grandchild’s tuition. You can also use this cash value to pay for the premiums on your policy when you get older. If you build up the cash value enough you can have a paid up policy so you would no longer have to pay any premiums out of pocket and the policy can still run the rest of your life.
There are a few different types of permanent policies.
Whole Life Insurance
Whole life insurance is not a temporary policy. Whole life insurance is a cash value policy. These policies are designed to run your “whole life”. They build up cash value in an account called the account value. This money can earn interest and/or dividends and it can grow larger and larger based on the company and the dividend or interest being received.
Whole life insurance is a higher initial premium than term life insurance. As you pay your premiums you money is put into your account value. The insurance company then deducts the cost for the insurance from your account value. Your premiums are high than the cost of insurance so the left over money stays in your account. This left over money earns dividends or interest based on the insurance company and policy.