When faced with the wide range of life insurance coverage available, you may wonder what type fits your needs now and what coverage you should consider for future needs. A good first step is to look at two basic types of insurance coverage: whole life and term life.
Whole Life Insurance—Cash Value for Your Dollar
Whole life insurance helps to provide not only security from financial hardship in the case of a death, but also a cash value component of the policy.
Under a cash value life insurance policy, premium payments cover the cost of pure insurance coverage first, including the expenses and mortality factors of the insurance company; the insurance company then accumulates “leftover” dollars to build the cash value of the policy.
In addition to cash value buildup in the policy, some insurance companies may provide whole life insurance policyholders with dividend payments—due to lower expenses, lower mortality rates, and higher company investment results than were predicted when premiums were set.
Another whole life insurance feature is predictability of expense: premium amounts payable at policy inception will not change. The higher premium charged for a whole life policy helps to keep the premiums level over time, compared to the premiums for term insurance that increase as the insured ages.
A guarantee of insurability comes with any whole life insurance policy. Once the individual to be insured provides initial evidence of insurability—and as long as premium payment responsibilities are met—
the insured is guaranteed coverage for life, in accordance with the terms of the policy. Evidence of insurability will never be necessary again, as long as the original policy remains in force.
One final feature to consider is the value of whole life insurance as a “creditor,” if necessary. Funds may be borrowed against the cash value of the policy at any time. Loan approval must come from the insurer, but is generally fairly routine. No repayment schedule is set beyond regular payment of interest on the loan, with outstanding loan balances deducted from the death benefit in the event of the death of the insured. Thus, the loan ability of the policy should be used sparingly, with any loans paid off in a timely fashion.
There are numerous variations on whole life insurance as it was originally established. An exploration of which one best fits your needs may be in order. Let’s take a further look.
Term Insurance—Pure Protection for Your Dollar
As the name implies, term insurance provides pure insurance protection for a specific period—or “term”—of time. It does not generally offer any guarantee of premium stability or right of renewal. Nonrenewable, nonconvertible term insurance for one, five, or ten years probably provides the lowest cost protection available, and it is this cost factor that is its most beneficial feature for some individuals.
There are short-term and long-term policies that may provide for renewal, as well as for level premiums during the term (e.g., a 20-year renewable term policy). There are also “convertible” policies that allow the insured to convert the term coverage to some form of permanent insurance without proof of insurability. These features add to the overall cost of term insurance premiums, but may be of value to particular individuals.
In reviewing term insurance, ask the following questions:
- How much will premiums increase in future years should insurance coverage continue to be a necessity?
- What is the history of the insurance company regarding rate increases? Is there a “ceiling” on rate increases?
- Is renewability guaranteed? What are the renewal requirements?
- Are there discounts for annual vs. semi-annual premium payments?
- Are there non-smoker discounts, or reduced rate increases for showing good health over a set period of time?
- Are there large policy discounts for coverage above certain amounts, such as $100,000 or $250,000, or for aggregate coverage of a group of insureds?
- What are the rates for women vs. men?
Your Personal Life Insurance Needs
Once you have studied the available options, you need to view them in relation to your personal needs. You may seek an instant “estate” to provide for loved ones, financial obligations, and the fulfillment of your personal wishes in the event of your death. Your insurance professional can assist you in regularly reviewing your insurance coverage to help you determine if your current choices are helping you meet your short-term needs, as well as your long-term goals.