When shopping for a life insurance policy, people are most often focused on the cost instead of benefits. Life insurance policies offer various benefits that could prove valuable in achieving your goals, so it is important to learn and understand the features of a policy and not focus solely on price. For example, some policies accumulate cash value using market indices such as the S&P 500 or the NASDAQ while limiting your downside. These types of policies can be an additional way to invest or save, while other types of policies do not accumulate cash and are lower cost forms of pure insurance, typically for a period of time. To ensure your policy benefits are utilized to the fullest extent, understanding these features is important. Understanding your goals will help you select the right insurance product. While there are many versions of insurance policies offered by the top insurance companies, they are basically different versions of term, whole life, universal life (“UL”) variable universal life (“VUL”) and final expense insurance. We will be discussing the differences amongst each type of policy and hopefully provide you with a better understanding of each type.
- Term Life Insurance is the most basic, generally lowest cost and most popular form of life insurance. As the name states, term life insurance pays out the death benefit when the insured passes away within the term of coverage. Once the term expires, you may be able to purchase another Term Life policy or convert the policy if the current policy includes this option prior to the term expiring. Term insurance does not accumulate cash value and offers little benefit other than a conversion feature. The benefit of having a guaranteed conversion feature is that in most cases, even if you have had health issues since purchasing the term policy, you are guaranteed to be issued a policy, usually at the same underwriting status (standard or preferred) as when you purchased the term policy. This is particularly important if you still need insurance but are now no longer insurable because of your health. Term is the simplest and usually the lowest cost type of insurance coverage you can purchase. If you are searching for the least expensive option and not interested in anything other than the death benefit, then term insurance could be a great option for you.
- Whole Life Insurance is a permanent type of insurance that insures the policyholder’s lifetime, rather than just a certain time period. One of the key features of a whole life insurance policy is that it accumulates cash value, particularly if you purchase it when you are younger. Another feature of whole life insurance is that you can borrow a portion of your cash value while you are still alive. However, if there is an outstanding loan balance at the time of death, the outstanding balance will be deducted from the death benefit amount your beneficiaries receive. With most permanent policies, the amount of premiums you pay are more than the insurance company’s cost to insure you, thus enabling the policy to accumulate cash value. Whole life policies typically pay dividends which are a percentage of the profits of the insurance company distributed to policyholders. The amount of the dividend you will receive is based on the cash value in the policy. Dividends can be both guaranteed and non-guaranteed, so it is important to read the policy documents and or ask your agent. With whole life policies you have the ability to use your dividends in different ways. You can receive the dividends as cash, use the dividends to help offset the cost of your premiums or you can use them to purchase paid-up additions or PUAs. PUAs are small amounts of paid-up insurance coverage, meaning those additional amounts of death benefit will not cost you any additional premiums. Many insurers offer add-on benefits, known as riders. Typical riders include accidental death benefit which is additional death benefit in the event you die as a result of an accident. Waiver and waivers of premiums is a rider where the premiums are waived if the policyholder becomes disabled and allowing for the policy to stay in force. As with all permanent policies, whole-life policies have a withdrawal clause– this allows the insured to close the coverage and receive a cash surrender value.
- Universal Life Insurance (“UL) is another type of permanent life insurance. Universal life insurance offers the ability to pay flexible premiums and can accumulate cash value. If you are looking for something more flexible than whole-life insurance, universal life policy’s offer just that. The insured can adjust death benefits and premiums. The insurance premiums contain two elements: a “cost of insurance” (COI) amount and a saving component– this is known as the cash value. Provided you pay the recommended or target premium in the early years, the collected premiums in excess of the COI and policy charges, will accumulate as cash value earning interest in the policy. In later years, the accumulated cash value along with your premium is used to pay for the increasing COI as you get older. Using the cash value allows you to pay the same level premium over the years. Universal life policies also offer many riders such as waiver of premium as well. If accessing cash throughout the life of the policy, having premium and death benefit flexibility and cash accumulation is important, then a universal life policy may be a great option for you.
- Variable Life Insurance policy (“VUL”) appeals to buyers who are interested in investing and growing their cash value on a tax-deferred basis while having insurance protection. Just as the name sounds, a variable universal life insurance policy offers many of the same flexibilities as a universal life policy. The main difference is that the policyholder’s excess premiums after the COI can be invested into a series of pre-selected sub-accounts similar to mutual funds. The sub-accounts offer a variety of investment options from a fixed interest account to domestic and international equities and fixed income. The main difference from the other types of permanent policies is that the policyholder takes the risk with the cash value. This means if the sub-accounts don’t perform well, the policyholder may have to pay additional premiums as they age to cover the COI or reduce the death benefit. However, if the sub-accounts perform well, your money will grow on a tax deferred basis like other permanent types of policies. Additionally, they may offer many of the same riders of whole life or UL policies but not all, such as waiver of premiums. Variable life insurance is recommended for someone who is familiar with the markets and is comfortable taking investment risks.
- Final Expense Life Insurance is a whole life insurance policy that has a small death benefit, typically $10,000 to $20,000, and is generally available to seniors regardless of their health because of guaranteed issuance. Guaranteed issue is more expensive than simplified issue where you have to qualify medically. Final expense life insurance is made to cover final expenses such as funeral costs, cremation, caskets, or any extra final costs. Although this policy is designed for final expenses, technically the beneficiary can use this death benefit however they please. This policy is sold as a way to for seniors to cover their final expenses rather than burden their families. If you already have an existing life insurance policy, it is important to note that the death benefit can go toward the final expense cost as well. If you have a permanent policy, you may not need to purchase a final expense policy.
In general, shopping for the right life insurance can be difficult. Take the time to read through each policy brochure and focus on the key features to determine which one best fits your needs. Whether it be a term or a whole life policy, achieving your goals for insurance coverage is the key.