Navigating Life Insurance

Life insurance is a great way to make sure your family is taken care of when you are gone. It gives your family peace of mind that they will not go into debt to pay for your funeral expenses or deal with the loss of your income. You need to be careful when you are shopping around for life insurance because they are not all the same. Different policies are designed for different people and uses. The most important thing to consider is how much is needed to financially make up for your absence. Most policies will fall into one of 3 categories: term life, whole life, and universal life. A good understanding of the basics of the most common types of life insurance is key to choosing the right policy.

A Few Types of Term Life

Term life insurance is sometimes referred to as “temporary” because it only offers protection for a certain amount of time.  Once the term has ended, the policy will usually renew annually until the owner is a maximum 95 years old. Term life can be broken down into 3 categories based on premiums:

  • Level Term – Your premiums will stay the same for the duration of the policy whether it is 10, 20, or 30 years. This is considered the easiest to understand and is probably the most affordable. It is good for people with long-term debts and dependents.
  • Decreasing Term – Your premiums decrease over time, but start high. This type of term life is also called mortgage protection. It is designed to match duration of long-term debt such as a mortgage and the payout decreases overtime as you pay down the debt.
  • Group Term – Policies usually offered by your employer and the premiums are age rated, increasing as you get older. Group policies tend to be very affordable, however coverage ends if you leave the company.

Whole Life

A whole life policy is one that does not end as long as you are paying premiums until your death. They usually offer fixed premiums, fixed death benefit, and cash value accumulation. These usually will cost you more than other common types of life insurance, but you can get a lower premium if you buy when you are young.  Many whole life policies have a cash loan option for emergency expenses, but they also charge you interest on the money you take out. One of the most common variations of whole life is a policy with a long term care rider as a linked benefit. These policies have options to withdraw money interest free if it is used for long term care expenses. The best part of whole life policies is that they come in large denominations and can have a nice payout as long as you continue to pay your premiums.

Universal Life

Universal live plans are very similar to whole life, but there is the added element of an investment or cash account within the policy. The death benefit and premiums are fixed, but part of your premium goes into an investment or cash account that builds cash value. These flexible plans are good because the cash account can cover premiums if you need to skip a few payments as long as there are funds available. You can also take tax-free loans out of the cash accounts without diminishing the value of the death benefit.

Only you and your financial advisor can decide what sort of policies you should purchase. Be sure to talk to your benefits administrator or benefits consultant to discuss your options.