“Even death is not to be feared by one who has lived wisely.”
Death is one of the only truly certain parts of life, and while it might seem depressing, it still has to be planned for.
After all, if you’re not around to care for your family and loved ones then who’s going to do it?
Life insurance is the most common way to provide for those you leave behind, but it isn’t that simple. With so many complicated options out there, it can feel like you are at the mercy of the insurance company—or your personal insurance broker—to decide what kind of policy fits your needs.
If you’re worried that you don’t really ‘get’ how life insurance works, never fear. Here are the basics to help you make a confident, informed decision for your family’s future.
Term Life Insurance
Perhaps the simplest form of life insurance out there, a term life insurance policy covers the policy holder for a given length of time.
It might be one year, five years, or ten years, but during that period you pay your premiums and if something happens then the death benefit of the policy is paid to your survivors.
If nothing happens, then the policy needs to be renewed for another period of time, or canceled, which means it will never pay out the death benefit.
Many people receive term life through their employer, called Group Life, but the number is unfortunately shrinking; according to LIMRA, in 2017 only 48 percent of employers offered life insurance to their workers, a 23 percent decline from 2006.
Group life can also be more expensive than you think. Most group policies are priced in age bands that increase over time. If you’re young then your initial premiums will be low, but 20 years from now you could be overpaying.
My recommendation? Ask your financial advisor or insurance agent how much a private term policy would cost for the same coverage amount. You may find that the private policy is cheaper in the long run.
Permanent Life Insurance
As the name implies, this form of life insurance lasts as long as you do (provided that you keep paying your premiums).
With permanent life insurance there’s no gambling on whether or not you’re going to be covered when the event happens, and as an extra added bonus it’s possible to borrow money against the value of your permanent life insurance policy (in the event you need some of that value to pay bills and expenses before you die).
While not as simple as term life insurance, permanent life insurance is still popular. But keep in mind that your life insurance needs will change throughout your life, and just because your policy will last for the rest of your life doesn’t mean you shouldn’t review it every decade or so.
What does permanent life insurance look like? Here are some examples.
Whole Life Insurance
Whole life insurance is designed so that the premium paid never changes.
This does mean that the premium will be higher early on, but since you never have to take another medical exam, the premiums will even out over the length of the policy. This can be a good value for those who want stability in their life insurance policy.
Most whole life insurance policies also have another benefit: the cash value. As you pay your premiums, part of the funds are used to cover your death benefit, while another portion is put towards the cash value.
Think of it sort of like buying a house instead of renting. You pay more each month, but in doing so you are building value rather than simply paying to keep the policy open. Another way to think of it as a method of forced, automated savings into an investment account.
You can often take a loan against the cash value of your policy, which could be as high as the death benefit itself, or even withdraw the cash—but be careful. This will usually reduce your death benefit by the amount of the withdrawal.
If you’re looking for way to cover your family while also building value, and are willing to pay higher premiums up front, whole life might be a good option for you.
Universal Life Insurance
Universal life insurance is permanent life insurance with a twist: you can change the policy to fit your needs.
It sounds like something you should be able to do with any policy, but universal life insurance is designed specifically to adapt to your changing needs.
Like I said earlier, the type and amount of life insurance you need changes over the course of your lifetime. A policy that felt like a massive amount of coverage in your thirties might not accomplish everything you want it to by the time you reach retirement. And by that point, unfortunately, adding additional coverage only gets more difficult and more expensive.
Universal life policies work because you can adjust the death benefit up or down as needed. They can also allow you to pay part or all of the premiums from your accumulated cash value, giving you some control over cost.
So if you want to add features or take away ones you’re not using, this is the policy for you.
Variable Life Insurance
Picture this: you’ve been saving into your permanent life policy for some time now.
You’ve built up quite a cash value, maybe even as much as the total death benefit, and you feel good about yourself. You’re healthy, and you don’t plan on needing to the use the cash inside your policy any time soon.
At this point you might be looking at the pile of cash inside your policy and thinking; now what?
If having cash sitting around is something that bothers you, consider a variable life option. This type of policy invests your premiums into the market, so that you’re not only saving, but earning.
Holders of these policies can pick the mutual funds that are used, as well as numerous other things which can result in a faster and larger return on investment.
But just like with any form of investing, putting your policy’s cash value in the market is a risk.
Variable Life policies can provide some additional growth opportunities that other forms of life insurance can’t, but if protection is your primary concern, they might not be the best choice for you.
“In this world nothing can be certain, except death and taxes.”
– Benjamin Franklin
There are other, more specific versions of life insurance on the market, but these are some of the most common policies that buyers are going to run into.
It’s important to check all of the options, and consult with a financial expert before signing on the dotted line.
Not sure if your life insurance policy is meeting your needs? Let’s talk.
CLICK HERE to become an Insider! Join my Email Insider Group to receive weekly tips and tricks on finance, education, home buying, insurance, Social Security and everything in between. Byron W. Ellis, CFP®, CLU®, ChFC®, CRPC®, is a CERTIFIED FINANCIAL PLANNER™ professional and Managing Director United Capital Financial Advisers, LLC, a Financial Life Management firm. The information contained in this article is intended for information only is not a recommendation, and should not be considered investment advice. Please contact your financial advisor with questions about your specific needs and circumstances.
© Byron Ellis