A Little Life Insurance 101

A Little Life Insurance 101

Life insurance is an agreement between you and an insurance company – You agree to pay the premiums, and if you die within the terms of the agreement, your chosen benefactor(s) will receive a tax-free lump sum called a death benefit from the insurance company. There are two main types of life insurance policies: term and permanent. Term life policies provide coverage for a specified length of time, and if death does not occur within the designated term, the policy expires. Permanent life policies last for an entire lifetime, never expire as long as premiums are paid, and include a savings component accrues cash value over time. Below we’ll look at each life insurance type in more detail.

Term Life

Term life insurance policies last for a specific length of time (term). The most common terms are 10, 15, 20 and 30 years; however, there are some policies that will cover a term as short as 5 years. Term life policies have not cash value, and if the insured outlives the term, the policy expires.

Pros

Affordable
Easy to understand, simple to purchase
Some plans offer renewable policies
Some providers will refund premiums at the end of a term
Some term life policies can be converted to permanent policies

Cons

Eventual expiration – renewal may not be guaranteed
Premiums will often increase with age and health changes
Policies have no cash value
A health questionnaire and/or physical exam are often required for underwriting the policy

Consider Term Life if:

You’re a parent to small children
You have a mortgage
You have co-signed debt
Your income is the primary source for your household
You’re looking for an inexpensive way to cover your family for a specific time period

Permanent Life

There are three main types of permanent life insurance plans: whole life, universal life, and variable life. With all of these, coverage lasts for your entire lifetime as long as premiums are kept up to date. In addition to the death benefit, most policies have a living benefit or cash savings component that accrues value (tax-deferred) over time and can be withdrawn or borrowed against while you’re living, and the remaining cash value of the policy is often added to the death benefit amount.

Whole life – The most common type of permanent life insurance. Whole life policies provide coverage for your entire lifetime, premiums are typically fixed, and policies accrue cash value at a guaranteed rate (not market dependent) over time.

Pros

No policy expiration
Fixed premiums save money in the long-term
Cash value accrues at a guaranteed minimum rate.
Cash can be withdrawn or borrowed against

Cons

Considerably more expensive than term life plans
Withdrawals or loans on cash value can reduce death benefit
Policies are harder to understand

Consider Whole Life if:

You’re a high wage earner
You want to leave a gift to charity or loved ones
You want your insurance policy to also act as a vehicle for savings and counted as an additional asset

Universal Life – Similar to whole life, universal life is a permanent life insurance that provides coverage for your full lifetime and also accrues a cash value. The major difference between universal and whole life insurance is that this option gives you the ability to adjust your coverage and premiums as your needs change over time

Pros

No policy expiration
Cash value increases over time and can be withdrawn or used to pay premiums
Flexibility to adjust premiums and benefits as needs change over time

Cons

Considerably more expensive than term life plans
Hard to understand
Some plans do not pay remaining cash value to benefactor along with death benefit amount

Consider Universal Life if:

You want flexibility to make changes to your policy and premiums over time

Variable Life – A type of permanent life insurance that offers coverage for an entire lifetime with a guaranteed minimum death benefit and accrues a cash value over time. The difference between whole and variable is that the cash value is invested in a portfolio of securities (stocks, bonds, etc) that you can choose and the accrual over time is affected by market fluctuation.

Pros

No policy expiration
Opportunity for the insured to take an active role in growing the value of policy
Cash value can be withdrawn, borrowed from, or used to pay premiums

Cons

By far, the hardest to understand
Withdrawals can result in penalty effecting death benefits
Requires hands-on attention and may not be suitable for everyone’s investment needs

Consider Variable Life if:

You want a policy that offers financial growth potential
You like to take a hands-on approach to investing

Next Steps

Many factors effect which policy type you’ll choose including your present health, income & assets, debts, number of dependents, and future plans. There are online calculators (try this one from lifehappens.org) and quoting vehicles that allow you to do a lot of the research and footwork on your own if you’d like. You can access eIndividual’s instant quoting tool for quick quotes on term and whole life insurance here.

At eIndividual, we know that choosing the right life insurance coverage can be a daunting and emotional process. Our friendly experts are standing by, ready to help you understand your options and craft a plan that fills all your needs and lets you rest easy, knowing your family’s safety net is securely in place.Additional links and resources:

https://ei.my-protection-plus.com/services/101

https://www.lifeinsurance.org/life-insurance-by-type

https://www.daveramsey.com/blog/universal-life-insurance

http://www.iii.org/insuranceindustryblog/category/life-insurance/

https://www.lifeinsurance.org/blog/life-insurance-pros-and-cons

https://www.protective.com/learning-center/life-insurance/life-insurance-riders/

https://www.lifeinsurance.org/life-insurance-by-type/term-vs-whole-life-quiz

https://www.bankonyourself.com/life-insurance-living-benefits