When constructing any good, solid financial plan, life insurance should typically be considered. This is because in many cases, should an individual pass away, there will likely be survivors who will suffer some financial loss. This loss can be personal, business, or both.
From a personal standpoint, there are a number of reasons to purchase life insurance coverage. First, final expenses – including the cost of a funeral – can cost in excess of $10,000 today. There are also other debts that may need to be paid upon the death of an individual, such as a mortgage, personal loans, or credit card balances. Leaving loved ones or other survivors with such obligations could substantially impact their financial situation in a negative manner.
Personal life insurance also plays a part in income replacement purposes. Many young couples and families need to consider how expenses would be paid following the loss of an income earner. They should also consider how much it would cost to find and pay for a replacement should a stay-at-home parent pass away unexpectedly, as this too can be quite costly.
From a business standpoint, there are also numerous uses for life insurance, including the coverage of a company owner and key employees. In addition, life insurance is also often used as a tool for executive deferred compensation.
Types of Life Insurance
While there are numerous types of life insurance that are available in the marketplace today, there are only two primary categories of life insurance coverage. These are term and permanent.
Term life insurance is considered to be the most basic of coverage. This is because it provides a death benefit only with no other “bells and whistles” included on the policy. Term life insurance remains in force for a certain length of time, or “term.” Once that time period has elapsed, the policy will expire and the insured will be required to re-qualify for coverage if he or she wishes to remain insured. At that time, the insured will need to qualify at their then-current age and health status. This means that the new policy premium is likely to be higher than the previous policy’s cost.
Because of its “temporary” nature, and its basic coverage attributes, term life insurance typically has much lower premiums than permanent life insurance. Therefore, this type of coverage is oftentimes popular with those who are seeking a high amount of death benefit at a low cost. It is also a good choice for those who are seeking coverage for a shorter term need such as the duration of your mortgage.
Permanent life insurance offers a death benefit as well as a cash value or savings component within the policy. The cash is allowed to grow on a tax-deferred basis, and the interest will increase over time.
Types of Permanment Life Insurance
There are many different versions of permanent life insurance. These can include the following:
Whole Life Insurance
Whole life is considered to be the simplest form of permanent insurance. As its name implies, this type of coverage offers protection for the entire, or whole, life of the insured. While the premium for a whole life insurance policy will typically be higher than for a comparable amount of term life insurance coverage, as long as the policyholder continues making premium payments, the amount of premium will never increase.
There are two different types of whole life insurance policies. These include:
- Participating (Par) – A participating whole life insurance policy will allow the insured to share in the insurer’s excess profits in the form of dividends. The dividends are typically not taxable to the insured. This is because they are considered to be a return of a portion of the insured’s premium.
- Non-Participating (Non-Par) – With non-participating whole life insurance policies, the insurer will take on all of the risk of future performance. This means that if the cost of future claims has been underestimated by the company’s actuaries, the insurance company is required to make up the difference. If, however, the cost of future claims has been overestimated, the insurer keeps the difference. Therefore, non-par whole life insurance policies don’t pay dividends to their policyholders.
Universal Life Insurance
A universal life insurance policy is another type of permanent life insurance. These policies can be thought of as being similar to a term life insurance policy that has a cash value component. With these types of policies, a portion of the policy holder’s premium goes towards funding the death benefit and another portion goes into a cash account that earns interest as an investment. Similar to with a whole life insurance policy, the funds in the cash value component are allowed to grow tax-deferred.
Universal life insurance is known for its flexibility. This is because policyholders are able to change, within limits, the death benefit and the timing and amount of their premiums. As an example, if the policyholder pays a lower amount of premium on a particular month, the cash value will not build up as fast, but they may be able to make their budget work better that month. Also, if you have a month where you can put more in, you can make up a few payments. This is great for people who have impaired risk life insurance because if they have an extra medical bill one month they can adjust their policy accordingly.
Variable Life Insurance
Variable life is another form of permanent life insurance. These types of policies offer permanent life insurance protection to a named beneficiary upon the death of the insured. In addition to the death benefit component, variable life insurance also has an investment component – or separate account – where the policyholder can invest his or her funds within the insurance company’s portfolio of stocks, funds, and other various investment options.
Because of these underlying investments, it is required that a prospectus is also presented when variable life insurance policies are sold. In addition, those who sell these types of policies must hold a securities license.
It is important to note that while the underlying investment funds in a variable life insurance policy can offer the policyholder the opportunity for growth, these policies are also considered to be much riskier than whole life. Therefore, prior to purchasing a variable life insurance policy, one should consider all of the potential investment risks that are associated with it.
Variable Universal Life Insurance
Another type of permanent life insurance is variable universal life. This type of policy provides permanent death benefit proceeds along with flexible terms and investment options. The policyholder is allowed to change the death benefit and the timing and amount of the policy’s premiums within certain limits on this type of policy.
In addition, policyholders are allowed to invest their funds from the cash value component of the policy into professionally managed funding options that reflect the performance of underlying investments such as stocks and mutual funds. While these policies have more risk, they also offer the opportunity for the policyholder to grow their cash value more rapidly during periods of market growth.
Which is Better – Permanent or Term Life Insurance?
There are numerous differences between term and permanent life insurance – and with that in mind, which type of policy is better will come down to the needs and goals of the individual policyholder.
Overall, term life insurance is typically best for those who are budget conscious. This is because the premiums on term life insurance are usually lower than those of permanent life – especially for those who are young and healthy. Term life insurance can also be good choice for those who are covering a “temporary” need.
Permanent life insurance can be a good option for those who plan to keep their coverage indefinitely. This is because once the policy has been purchased, the coverage – and the amount of the premium – are typically locked in for life. This type of coverage can be of particular benefit to those who have smokers life insurance and may develop an adverse health condition, as their coverage will never expire (like term life insurance does), and the policyholder will not be required to re-qualify for a new policy at a later date.
Where To Purchase a Permanent Life Insurance Policy
When shopping for permanent life insurance coverage, it is a good idea first to compare policies and premium quotes. This is because benefits and price can differ a great deal from one insurance carrier to another.
We have a great quoting tool on the left of the page that can be very useful when gathering some preliminary quotes as you start your search. We do suggest contacting one of our agents so they can get some more detailed info from you so we can better personalize your quote.
Also feel free to reach out to us if you need more information about permanent life insurance or any riders that go along with the policies. Our number is 888-229-7522.