You’ve now learned the difference between life and mortgage insurance (If you haven’t yet, see our post here). You’ve educated yourself and you’ve decided to go with life insurance. Good choice! Now you have chosen to allow your beneficiary the best opportunity to take care of your debts and afforded your loved one with security.
Now that you’ve chosen life insurance as the route you’d like to take you can walk up to your advisor and say “I’ll take one life insurance please!” Right? Not so fast.
The one thing you love about life insurance is its flexibility. Unlike mortgage insurance, you’ve chosen life insurance due to its ability to be designed to fit to your needs. That means you’ve got a few more choices to make.
There are two basic types of life insurance you must choose from: term products and permanent products.
Put simply, term products offer protection and set premiums for a pre-determined term, while permanent products are permanent.
Term products don’t necessarily expire, but they can
Maybe you decide to go with a term life insurance policy. This could be a good choice for you because it’s generally cheaper than permanent products because it does not include a lot of the features of permanent products. Term products can be likened to car insurance. The insurance is paid for monthly, or yearly, and pays out in the event that you need it. You can be said to be “renting insurance” because it is not possible to ever own this type of policy. There is no more to it than that. You choose a term of premiums, and after that term the premiums will renew. Premiums tend to be lower during the first term and increase each following term.
Term options vary from company to company, but the most common options are 10 year, 20 year, and term life products. After the 10 and 20 year periods you can choose to convert your policy to a permanent product at your current age at any time during the term period, or allow the policy to renew to a higher premium at the renewal anniversary. Term life products will last for life and offer all the insurance value, without the frills.
The 10 and 20 year term options are great for people who are young (as the premiums will be very affordable), people who need only the insurance value and nothing else, or those who expect to pay off any debts within the term period.
Permanent products are well, permanent
Permanent products don’t expire and generally, do not include any type of renewal option (one exception is a cost of insurance called annual renewable term, which has a yearly renewing premium- often chosen by those who are looking for an affordable product now, and expect to make more money in the future to be able to cover increase premiums costs).
There are two types of permanent insurance: universal and whole life
Universal life is an insurance policy with an investment component.
This investment component leads to a lot of flexibility within this plan. With universal life insurance you have the ability to pay above and beyond your premium in order to build up the cash value in your insurance. Your cash value is invested in funds that can earn interest and increase the value within your policy.
Depending on what type of death benefit you choose, your cash value can either be paid out to your beneficiary upon your death (this is called a cash-plus death benefit option) or, can be used to decrease your premium (this is called a level death benefit option). With the level death benefit option the cash value decreases your costs, as the insurance company requires a smaller premium because less value is at risk of being paid out to you if they get to keep the cash value upon your death.
You can also pay your premium in a lump sum. This will sustain your policy, depending on how much you deposit. As long as there is cash value in the policy to cover the premiums then you don’t need to worry about a monthly or yearly payment to your life insurance. Be sure to talk to your advisor about any tax consequences overfunding could trigger before depositing any lump sum your policy.
Whole life insurance can pay for itself
Whole life insurance is also a life insurance policy with an investment feature, but this may be a riskier choice if that is the insurance’s sole feature. This risk and investment opportunity may make the insurance a great choice for you as well.
There is a permanent component of insurance on your policy that you pay a premium towards. The difference with whole life insurance is that an overpayment of your premiums is not as simple as placing your funds into a cash value fund within your policy. Instead, you can opt for a participating policy. In this case, a part of your premium is invested by the insurance company and if the investment performs, then you will be paid a dividend. You can choose how the dividend is paid to you, whether it is paid out in cash to you, added to a cash value within your insurance policy, or used to buy more life insurance within your policy. Dividends can be a riskier option though, as when the investments are not performing this can cause you to need to increase your premium in order to maintain your current death benefit value.
Both types of permanent life insurance products are quiet complex and can offer great opportunities for investment, paired with a secure and permanent death benefit. To find out which type of life insurance suits your current needs talk to one of our advisors today.