Life Insurance Is Not One-Size-Fits-All…What Type Should You Have?
February is ‘Insure Your Love’ month so it’s a good time to give some thought to how you would protect your family if you were to suddenly pass on. Almost everyone needs some sort of Life Insurance protection but what type and how much will vary depending on your unique needs. There are hundreds of insurance companies offering many different types of Life Insurance policies so if you’re confused, you’re not alone. We’ll keep it simple in this blog and look at 3 common types of Life Insurance.
Term Life Insurance
Term is the most common form life insurance sold because it’s easy to understand, relatively inexpensive, and easy to get for most people. Term life insurance is one of the simplest and most affordable ways to ensure that your loved ones are provided for.
- The Basics: Term life insurance lasts for a set number of years (or “term”) before coverage terminates. Most polices last from 10 to 30 years. You pay premiums for the policy and, if you die during the term, the insurance company pays your beneficiary the death benefit. This death benefit can be paid out as a lump sum or in scheduled monthly or annual payments.
- Advantages: Term life is very affordable, especially for younger people just starting out with families. It’s an inexpensive way to make sure that the mortgage is paid, an income is replaced, or children’s college tuition will be paid. Term policies often have options to add additional coverage for children, add a disability income benefit, or an option to have all of your premiums returned to you at the end of the term.
- Disadvantages: Even with longer term periods, the policy will expire at some point and you may not be able to medically qualify for new insurance one the policy ends.
- Best Fit For: People who need a lot of protection for a limited time such as for mortgages or while children are young. Also good for people with limited budgets.
Final Expense Insurance
This is also known as burial insurance or funeral insurance. This type of life insurance is designed to pay a smaller death benefit (usually $5,000 to $25,000) to your family to help cover end-of-life expenses. This include the cost of a funeral or cremation, final medical bills, estate settlement & travel expenses for family and so on.
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The Basics: This type of life insurance is usually easy on underwriting…some policies are even guaranteed issue. Due to the smaller death benefit amounts, these can be very affordable, even for older people who are the most common policyholders.
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Advantages: The vast majority of these policies are Whole Life Insurance which means they do not terminate after a set period. They also accumulate cash value that can be accessed without terminating the policy.
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Disadvantages: The cost per $1,000 is higher than Term Life although the lower death benefit amounts keep the monthly premium lower. People with sever health conditions may be able to get guaranteed coverage but it is more expensive and full benefits may not be paid to the beneficiary until the policy has been in force for 2 to 3 years.
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Best Fit For: People over 40 who need a permanent Life Insurance plan that will not increase in premiums or decrease in benefit. It’s best to get the plan when younger and healthier to qualify for preferred premium rates.
Universal Life Insurance
Universal life insurance is a flexible permanent Life Insurance plan that combines a permanent death benefit with a cash value account and the ability to alter how much you pay toward premiums. Increasing target premiums helps to build the cash value account. The cash account can also be accessed to lower or suspend premiums. Universal Life plans can be a great way to accumulate savings on a tax deferred basis or for use in estate planning. However, they are more complicated Life Insurance vehicles needing careful planning and monitoring.
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The Basics: Universal life insurance allows you to adjust your premiums and death benefit depending on your needs. If, after some time, you decide to stop paying or lower your monthly premiums, you can use the cash value to cover your premiums
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Advantages: Flexibility allows for use in more complicated Life Insurance and Financial Planning needs. Cash value accumulation can be based on specified interest rates or market performance. Premiums can be adjusted based on financial needs.
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Disadvantages: A more complex product best used as part of a larger financial plan. There is a risk of loss in the cash value account if a market index is used for crediting.
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Best Fit For: Higher earners who need a long-term solution for Life Insurance protection, estate planning and/or tax-deferred savings.
So What’s The Best Fit For You?
Everyone’s needs are unique so even if you didn’t fall into one of these categories, there is still a solution for your needs! Sometimes, a mix of different products is the best answer to provide you with complete coverage. In other situations, a straightforward, inexpensive solution is a perfect fit!
