No one wants to talk about the day he or she is going to die, but that day is inevitable for all of us. Unfortunately, people wait to bring the subject up, sometimes until it’s too late.
A 2017 Princeton survey showed that 37% of Americans do not have life insurance. Of those, 59% cited expense as the reason why they haven’t purchased life insurance. The other half, 51%, feel that because they’re healthy, they don’t need life insurance. Finally, 33% say that buying insurance is too confusing.
To alleviate this confusion, Benzinga has reviewed the different types of insurance to help you make an educated decision of the best option for you and your family.
Life insurance categories
Life insurance is divided into two basic categories.
Term is temporary insurance designed to give coverage for a specific period of time.
Permanent insurance is designed to last the policyholder’s whole life.
Within these two categories, there are subcategories to help narrow down the type of coverage the individual is seeking.
Overview of term insurance
Term insurance is a temporary form of life insurance. It is designed to last for a specific period of time, called a term. If the insured dies within the policy term, then it will pay out a death benefit, usually to a specified beneficiary. If no beneficiary is designated, then the death benefit, also called the sum assured, will be paid to the insured’s estate.
There are two basic forms of term insurance, level and decreasing.
Level term insurance has a fixed sum assured as well as fixed premiums over the life of the policy. One would select a level term policy if they were concerned about:
Affordability: Cost is probably the biggest reason many do not purchase a life insurance policy. The benefit of a term policy is that it is less expensive than a whole life policy.
Bills left behind: If you were to pass away, you would not want to leave an outstanding debt like student loans, a car payment, or medical costs for your family to have to bear.
Specific needs that eventually end: You may only have concern for a specific incident, or want added protection to an existing policy. Raising children through college or having an installment loan payback are circumstances where a term policy is beneficial.
Decreasing term insurance, also known as mortgage life insurance, is a term policy where the sum assured decreases over the life of the policy. The premium generally remains constant through the life of the policy. It is designed to provide coverage if the insured dies during the term with an outstanding decreasing debt such as:
Mortgage: A decreasing term policy renews each year with the sum assured amount decreasing, usually in line with how a repayment mortgage outstanding balance decreases.
Student loans: Just like level term, you can use a decreasing term policy to help pay back any outstanding student loans you may have if you were to pass away before paying in full.
Automobile loan: You don’t want your spouse or another family member to lose the vehicle they have grown dependent upon. Using a decreasing term policy can be set up for the life of the auto repayment schedule.
Other forms of Term
Increasing: This form of term insurance takes inflation into account. The sum assured increase each year, or at specific life events such as the birth of a child or job promotion. You will not have to prove insurability at each renewal, but the premiums can increase as well.
Convertible: This term policy leaves the option open for the insured to convert their term policy into a whole life policy during the term. It may have some stipulations as to a time period where this can take place. Premiums may be a bit higher, but you will not have to prove insurability when you do convert.
Renewable: This form of term insurance gives the insured the option to renew his policy at the end of the term without having to prove insurability. He or she could have an increased premium due to their new attained age.
Overview of permanent insurance
Permanent insurance is a “catchall” term for life insurance policies that last for the insured’s life and builds cash value. The policy will remain in force as long as the insured makes the payments.
Having a cash value is an important attribute of permanent insurance. It builds upon a tax-deferred basis. It can be used anytime in the future for whatever you wish, maybe as a down payment on a home or for a child’s college education. You are, however, borrowing against the policy’s cash value and that amount will need to be paid back, but it is a loan you do not have to qualify for like traditional loans. Any amount that is left outstanding at the death of the insured is subtracted from the death benefit.
There are several forms of permanent life insurance. We will review the most popular types.
Whole life insurance is just that: Life insurance that is intended to last for the insured’s entire life. Premiums are fixed as well as the sum assured. The policy remains active if the premiums are paid. A few reasons why one would prefer whole life are
Fixed premiums: If you like predictability, then a whole life policy is for you. The premiums will remain fixed over the life of the policy. It also provides a guaranteed death benefit amount and a guaranteed rate of return on the cash value that builds.
Ability to receive dividends: After a couple of years of having the policy, the insurance company begins to distribute dividends to its policyholders. These can be issued as a cash sum or can be applied to your death benefit.
Cash value: As we discussed earlier, permanent insurance builds cash value. This cash can be borrowed to help you with purchasing a home or helping kids through college.
Variable Life is a whole life policy that has an investment portfolio attached to it. The death benefit and cash value rise and fall with the performance of the portfolio. The premium remains fixed, but the death benefit will fluctuate as the market does. The reasons to choose a variable life policy are that you are:
Open to taking risk: The investment risk is placed on the insured and not the company. It is not the company’s good standing that stands behind the policy value; it’s the market it is invested in.
Wanting to see greater returns: The investment performance will likely determine your final death benefit. If the portfolio underperforms, then the policy will pay out less. If it outperforms, then it will pay out more.
The greatest benefit of universal life is the flexible premiums. You have the ability to pay more in good times and less when finances are tight. There are, however, limits to the minimum you can pay. You also have the option to increase or decrease the death benefit. Reasons to select a universal life policy are:
Your income varies: After your initial payment, you can pretty much pay when and as much as you want. There are limits, but if you have a job where your money coming in varies during different parts of the year, this policy is ideal.
An easier way to increase death benefit: You can choose to decrease the death benefit to save on premium cost or increase the benefit if the need arises, although you will need additional underwriting if you want to increase it.
Variable Universal Life
Variable universal life ties the benefits of a variable life policy with the benefits of a universal life policy. It offers you more flexibility with how you handle your life insurance and the investments that come along with a VUL policy. Premiums are generally lower with these types of policies compared to a whole life policy.
As with most investments, there is always risk involved. With a VUL policy: If your investment portfolio sees negative returns and your cash value falls below what it costs to maintain the account, you may be required to make additional premium payments to keep your policy intact.
Overall, these are the benefits from having a VUL:
Premium flexibility: You have a greater range of flexibility on how much premium you pay. You can pay the normal payment, or you can make a lump sum payment into your policy to increase the cash value. It is subject to IRS limits.
Cash value flexibility: If you should come upon hard times, you are able to skip a payment if you have the funds within the cash value and you can also take a loan off of your cash value should your hard time warrant the need.
Insurance flexibility: You have the ability to increase and decrease the death benefit amount to fit your needs at the time.
Investment flexibility: Your premiums can be put into a variety of different investment sub-accounts, and you have the ability to transfer funds between investment accounts without paying any taxes. There are limitations to how many times you can do this.
Other life policies
This permanent life insurance is designed for those who will have more than one insured party on the policy. It is often called second-to-die insurance because the policy will pay out when the second named insured dies.
It is designed to help with final costs and estate taxes, which usually is not needed until the second of a married couple dies. It is generally less expensive than if the two were to get separate policies and also if it is difficult for one party to be insured, they would be more likely to obtain coverage under a survivorship life policy.
Final Expense Life
This type of permanent insurance is intended to help loved ones with the final costs after the insured passes away. Funeral costs, caskets, and other costs of burial can be overwhelming. This policy can help alleviate those pressures from loved ones so they can care for each other in their time of mourning. It offers a level premium and fixed death benefit.
No Medical Exam Life (Simplified Issue Life)
For this type of permanent insurance policy, you do not have to undergo a medical exam. All that is required is to answer a few simple health questions. Your premiums are fixed for the life of the policy as long as payments are made. It is often used to cover final expenses, funeral costs, and debt.
Guaranteed Issue Life
For this type of permanent insurance policy, you do not have to have a medical exam or answer any medical questions. You are accepted regardless of health. Since there is no need for medical underwriting, the premiums do tend to be higher than a traditional policy. There are also limits as to how much coverage you can have.
There is also a waiting period for the full death benefit to be able to be paid in full, usually about one to three years. If you were to die within the waiting period, your beneficiary would only receive the premiums paid as a death benefit. These are usually the last resort type of policy meant for final expenses and funeral costs.
Group life is most often associated with employers. It is the no-cost life insurance policy the company you work for offers its employees. There may be even an option to purchase additional coverage as the coverage provided could help an individual, but it is not designed for one who has a family. It is a guaranteed issue, meaning no medical exam or health questions. It is best to think of group life as a supplement and not a substitution for an individual life policy.
The uninsured view life insurance as an expense: Something someone buys, but could live without. Those who have purchased a policy view it as an investment. They understand the consequences of dying without coverage and leaving expenses to the loved ones left behind.
Unlike a car or home insurance policy that you buy in hopes of never having to use it, life insurance is based on an event that will happen. It is a policy that you are almost guaranteed to use.
Now that you have a greater understanding of the different policies, the only thing left is to talk with an insurance agent or your financial advisor. They can help you determine which policy best suits your needs and how much coverage you will need for:
- Your final expenses by taking a look at what it currently costs for burial and attempt to calculate any final medical expenses.
- Any unpaid mortgage by evaluating what you owe against the current interest rate.
- Leaving a lump sum to ensure that your family will be taken care financially when you pass on.
Life insurance can ease the burden of losing a family member. When the right policy is purchased, with the proper amount of coverage, for the right reasons, it will give your family the opportunity to focus on each other during their time of loss instead of worrying about what they are going to do financially.