You hear a lot in the media debating the merits of term life insurance versus the merits of permanent life insurance policies, including whole life and universal life insurance.
Anyone who advocates 100% for or against any kind of life insurance structure is missing the point: The best type of insurance to own is the type that is in place when the insured dies!
And here is the addendum to that rule: The best amount of life insurance to purchase is the amount you can easily afford.There is a place for term life insurance, and a place for permanent life insurance. The most important principles to bear in mind are these: Purchase the policy that:
1.) You can afford,
2.) Best fits your need, and
3.) Is most likely to be in force when you pass.
Focus on these three things!
Term Life Insurance
Term insurance is designed to be affordable, with a large death benefit. The trade-off is that term insurance, as the name implies, is temporary. It is valid for a set number of years, typically 10, 15, 20 or 30 years during the set time-period, if you have kept current on your premiums.
There are new term policies that can run up to 40 years just approved in New York State, so a 45-year-old non-smoker can purchase an inexpensive term policy up to his/her age 85. This can be a game-changer!
The younger you are when you purchase term life insurance the better, because your rates are locked in. Conversely, the older you are when you first buy the policy, the more expensive the premiums will be. Your health condition will be considered when premiums are set.
Term life insurance can be a good fit for younger families who need a large death benefit at an affordable cost, to protect them against the potentially catastrophic loss of a breadwinner.
Permanent Life Insurance
Permanent insurance is designed to pay a death benefit even if you live to a ripe old age, and it does not expire if you keep paying the premiums. There are two basic varieties: whole life and universal life.
Whole life policies feature a guaranteed death benefit for life, guaranteed-level premiums for life, and guaranteed growth in cash value. In other words, it has a death benefit, and the savings component has a fixed interest rate that builds cash value over time. Usually, life insurance companies will pay a higher interest rate than banks, sometimes as much a 1-1.5% higher.
Universal life policies feature a guaranteed death benefit, along with a cash-value component as well. They offer more flexibility than a whole life policy. For example, universal life policies allow you to increase or decrease your death benefit and the policy’s cash value can eventually grow and result in a zero-cost policy, in which all premiums are paid from the cash value you have amassed.
Also, the interest rate on the cash value component is not fixed. Instead, it has a guaranteed minimum interest rate, but the rate can change over time based on market conditions.
Upon Review:
Term life insurance is the most affordable protection for young people; however, term policies are actuarially designed to lapse. Only 2% to 5% ever pay a claim.
Therefore, while term provides the most protection for new policy purchasers per dollar of premium, if it is secured later in life, it can be cost prohibitive.
With permanent policies, it is quite the opposite. Whole life policies require a larger premium commitment for the same amount of death benefit. It is like owning vs renting a house. Owning costs more/month; however, you are building equity and can turn a profit later.
A universal life policy costs less (it can be 20-40% less) out of pocket than whole life. If the policy owner contributes enough premiums into the policy, they can build cash value very quickly. In the long run, if you live to your actuarial life expectancy, you will receive more benefits from a whole life policy than you put into it, either via cash value or via the death benefit.
In addition, the newer policies have living benefits (long-term care like riders) that you can access to pay for some health care needs later in life while you are still living.
Are you confused yet? We have access to more than 100 A-rated life insurance companies. Newer policies have living benefits that older policies do not. Do yourself a favor and review your life insurance. Feel free to reach out to me for a free review at [email protected]!