Life insurance is essential for securing the financial future of your loved ones. Whether you are just starting out or getting ready to retire, a life insurance policy can provide your family with financial security if you are no longer around.
Various types of life insurance are available to meet your needs and preferences. Choosing temporary or permanent life insurance depends on your short- or long-term needs. Life insurance comes in various forms, each of which has its benefits and drawbacks. This article will look at the different types of policies, their benefits, their pitfalls, and how to get started.
How Temporary Life Insurance Works
Temporary Life Insurance is more commonly referred to as Term insurance. This is because the policy is purchased and will only exist for several years. The term of a temporary policy is typically purchased in 5-year increments, such as 10-year, 15-year, 20-year, etc. This policy’s monthly or annual price is locked in for the policy life. At the end of the term, the policy will either expire, or you may be able to continue the coverage at a new, much higher premium.
Term insurance is usually very attractive because of its price. Temporary insurance is offered at a significant discount compared to permanent policies. The common phrase “Buy Term and Invest the Difference” highlights the difference. Since the price is so much cheaper, term policies free up cash flow for individuals and allow them to set aside these savings for retirement. These cheap policies may allow you to accomplish multiple financial goals.
The downside to temporary insurance is right in the name; they are temporary. The average life expectancy is around 85-90 years, so life insurance companies offer these policies assuming you will live that long. If your policy term expires at age 70, the life insurance company assumes you will live beyond that and will not use the policy. This is a financial drawdown for the policy owner since they would have paid for the policy for all those years and never used it.
How Permanent Life Insurance Works
Permanent life insurance has more versions than temporary insurance and is often considered to be more complicated. This coverage is referred to as permanent because the policy will last until the insured dies or until premiums are no longer paid. To discuss these policies, we need to highlight the differences between Fixed and Variable policies and the differences between Whole Life and Universal policies.
Cash Value is often a benefit included with permanent policies. This is an underlying policy benefit that will grow as the policy ages. The policy owner can withdraw this benefit, or it may be used to enhance the policy’s death benefit. Fixed and Variable policies differ in the way that the Cash Value grows. Fixed policies credit a consistent interest rate to the policy, and Variable policies may be invested more aggressively using mutual funds. The appropriate form of insurance depends on the owners’ risk tolerance and financial goals.
Whole Life vs. Universal Life Insurance
Whole Life insurance is the most traditional form of the permanent policy. This type of policy includes consistent policy premiums and benefits. Since the premiums cannot be altered, the underlying cash value will grow more regularly. Universal life insurance policies offer more flexible premiums and usually are less expensive than Whole Life. Universal policies, when designed correctly, are a cost-effective way to purchase permanent insurance. However, when they are designed incorrectly, a policy owner could have the policy run out of cash value and no more extended offer coverage. Universal policies have a minimum required premium, but some individuals may pay more if they want a higher death benefit or cash value.
Speak With a Trusted Advisor
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We hope you learned something today. If you have any feedback or suggestions, we would love to hear them.
Zachary A. Bachner, CFP®
with contributions by Robert L. Wink, Kenneth R. Wink, and James D. Wink
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If you are looking to learn more about life insurance, check out these additional resources! Our very own Zachary Bachner has contributed to a variety of articles in the past, and these two pieces may further answer some of your life insurance questions. The information within these articles should not be taken as financial advice but rather as educational information. Please reach out to your personal advisor if you are interested in purchasing a life insurance policy