Understanding the nuances between different types of life insurance can be like trying to interpret a different language. It’s critically important to understand how these nuances affect your pocketbook and long-term financial goals when determining the right type of life insurance for you.
People become dissatisfied with any product they purchase (especially life insurance) when their expectations aren’t met on how it works, or what they are getting from it. The best remedy to this longstanding issue is to educate yourself on what you’re buying to ensure the product is accomplishing exactly what you expect it to. Any life insurance agent or broker with a Life License Qualification Program (LLQP) license should be able to help you with most insurance education.
Many people looking for life insurance quotes ask the same initial questions: what kind of life insurance is best me? I heard term insurance is cheapest? Whole life insurance has the best value, right? Should I buy term and invest the rest?
Like in most cases, these generalizations are of little or no value because each person’s situation is so unique and needs to be carefully evaluated by a professional. There is no rule that says term or permanent is a better solution in any one situation. That being said, there are common uses for each type of insurance: term insurance, universal insurance, and whole life insurance.
All insurance is grouped into two categories: Temporary and Permanent.
Temporary Insurance – Term10, Term20, Term30, Term65
Features – coverage is over the term set in the policy. For example, a Term10 has a level premium for 10 years, then renews at a much higher premium. Term30 has a level premium for 30 years, and a Term65 has a level premium until age 65. You want the term of the coverage to be longer than the time you’ll have the liability it’s covering. If you are covering a brand new mortgage for example, a Term30 would be your best option at first glance since the most common term of a mortgage is 25 years.
What it covers – Term insurance is meant to cover liabilities and replace income where there are financial dependents. Common coverage reasons are mortgage balances, lines of credit, personal loans, business loans, and to replace the income of families who have children or other financial dependents. Term insurance has the least expensive premiums but there are no cash values and usually only pay out due to premature deaths before 65. This means you don’t recover premiums if you live a full life, so you want to pay as little as possible for your needed coverage amount.
Permanent Insurance – Term100, Universal, Whole Life
Term100 – simplest permanent insurance solution. Level premiums to age 100 or death, with modest cash values. Death benefit remains level throughout the life of the policy.
Universal Insurance– most flexible and complex type of permanent insurance. Can be used as simply as a Term100, or as a powerful tax advantaged investing tool to greatly enhance the value of your estate. Also, features retirement planning aspects that are especially beneficial to business owners.
Whole Life Insurance – the most commonly used type of permanent insurance. A combination of life insurance and tax-sheltered investments, it features level premiums for life or other options, such as a paid up policy in as little as 10 years. Whole life has dividend options where you can cash in the dividend, or store it in your policy to enhance your tax-free death benefit.
What it covers – permanent life insurance in whatever fashion, is meant to cover permanent needs, meaning needs you see yourself having if you were to live a full life. Common coverage reasons are funeral expenses, leaving a legacy to your family, or covering costly capital gains and probate taxes at death. Permanent insurance policies are relatively more expensive compared to term insurance, however, it’s a guaranteed contract, so it’s more of an investment.
Contact a Hero today to make sure that you are choosing the right type and amount of life insurance to protect you and your family today!