After careful consideration, you have decided that it would be in the best interest of your family to purchase a life insurance policy. Good for you. It is a hard decision and can be incredibly uncomfortable to consider a world where you are not present to care for your family. However, having an insurance policy in place to cover the financial portion of your contribution to your family will help protect and provide for the future of your little tribe.
After making the decision, it is time to consider all that the life insurance world has to offer. Obviously, not all policies will be a match for you and your needs, but without proper research, how would you know? There are multiple types of life insurance policies, including but not limited to:
- Term life (level and non level term)
- Whole Life
- Universal Life insurance
- Guaranteed issue
- Survivorship insurance
- Group life insurance
This is not an exhaustive list, rather some of the more popular types. Here are some facts around some of the most popular coverages to consider when narrowing down your options for a life insurance policy:
Just a note on Cost: When choosing coverage, you want to be sure that you are picking a coverage that does not extend past what you can afford and does not add up to an amount that makes it difficult to save for retirement. Some policies can get pricey, making them less attractive, regardless of the “savings” benefit they provide. If you are looking to invest with something like a Universal Life plan, be sure the do your homework on cost and benefit to make sure it balances out for you.
Term life insurance is typically the least expensive of the different types of
coverage, as well as the most simple. Term life insurance works in the way you would basically expect it to. When the insured passes, the full coverage amount purchased will be given to the beneficiary. The payment amount stays the same for the entire term as well as the payout. The lengths of terms are typically somewhere in the 10 to 30-year range. This type of insurance gives predictability and is not dependent on stock market performance or the economy. One caveat to term life insurance is the option for nonlevel term coverage- meaning either your premiums will increase over time or the benefit will decrease. The cost savings isn’t much different from the level term, so most will opt for the level term in the end.
This coverage lasts for your “whole” life, hence the name. However, you can also use it as a savings vehicle where your cash will grow with a modest interest rate. A portion of the premium you pay is put into savings and with it comes the flexibility to use it if need be. There is a guaranteed payout, however, there are two big drawbacks to this type of insurance. a.) the premium is high relative to the cost of term life insurance. With a guaranteed payout and no end to the term, it is more costly to provide, therefore pricier to purchase. And b.) the interest earned is low compared to other investment vehicles and may not produce earnings worth paying the premiums for. This valuation is of course individual to everyone.
Universal Life Insurance and indexed universal life: Similar to whole life, a portion of your
premium will be put into cash savings, however, you get to choose (within range) what portion goes to your death benefit and what portion goes to cash. Unlike whole, the death benefit does have an end date (typically somewhere between your late 90’s and early 100’s). If you live past those ages, the death benefit will end but the cash benefit will most times still be received. In addition to Universal life, there is also indexed universal life. Used a vehicle for investment, indexed universal life insurance has its pros and cons like the rest of them. The main difference with indexed UL is that the cash can be invested in index funds to help grow interest at a higher rate.
What is Best For Me?
Which life insurance type you choose will reflect your goals for inheritance. Whether you are looking to leave a legacy that extends past care for loved ones or whether you are looking to take care of your family’s needs at a low cost, you will want to weigh your options personally and consult with a professional as well. Sometimes a little outside professional insight from someone who doesn’t benefit personally is just the medicine we need to make a well thought out decision- an important factor in safeguarding your family’s financial future.