What Kind of Life Insurance Do I Need?

What Kind of Life Insurance Do I Need?

There are really only two main categories of Life Insurance: Term Life and Whole Life (sometimes called Permanent Life). The reason I call them categories is because there are several types of each. What you want your life insurance to accomplish for you above and beyond a death benefit is what will determine which category and also which type of insurance you choose.

Term Life is the simplest category of life insurance, and usually the least expensive option. There are benefits to choosing a term policy if price is your main criteria (lower premiums are easier to budget for) but the temporary nature of term life means you can outlive your policy. The most popular term length is 20 years, with the policy terminating at the end of the term. Other term lengths can range anywhere from five years to thirty years based on your choice, and typically the shorter the term the lower the  premium required for the coverage. 

There are several types of term life insurance. The most popular type of term life is called level term, which means the premium does not change for a period of time called the term. Some level term policies give you the option to convert the policy to a whole life policy after the term is over. Choosing to convert a term life policy to a whole life policy will naturally affect the premium amount significantly, but you won’t have to pass any additional health underwriting to do so.

Less popular types of policy in this category include Annually Renewable term life, with a renewal option annually, and 5-Year Renewable term life, with a renewal option every five years. These types of policies can potentially decline your renewal if you develop a major health issue unless they include a guaranteed insurability clause. You can also get Term Life to a specific age (such as age 65).

Who would typically be interested in a term life policy? Quite often it is families with young children, a mortgage, and the daily expenses that come with raising a family. Since term policies are less expensive per benefit thousand, people can afford to insure themselves with a larger death benefit to potentially replace lost household income.

Whole Life (or Permanent Life) is a category of life insurance that covers you for your entire life span, even if you live to be 100! The premium remains level for the life of the insured, and the policy accumulates cash value over the years. The longer you live, the larger the cash value grows. Whole life policies that have loan provisions will even allow you to borrow money from the accumulated cash value after it has built up in the policy over time. Then you can either pay the money back to your policy or not. If you choose not to pay it back, the insurance company will deduct the loan amount from your death benefit when the policy pays out.

Universal Life is a type of Whole Life insurance that accumulates cash value with a stated interest rate on the excess COI (Cost of Insurance). The minimum interest rate varies from policy to policy (and company to company), so shopping around is highly recommended.

Indexed Universal Life takes the definition of Universal Life to a slightly higher level by pegging the earnings to an index, quite often the S&P500 but it could also be a stock or a bond that determines the interest rate. Typically, Indexed Universal Life policies offer principal protection and will not “lose money”. If you are a fan of annuities, you could probably appreciate this type of earnings scenario. Here again, shop around. 

Variable Universal Life policies typically offer a more robust upside potential, tempered by the lack of principal protection. “You win some, you lose some” is not in the average life insurance purchaser’s vocabulary, however the gains can be significant.

If you have an interest in a Life Insurance policy and would like to shop some different companies and rates, fill out the form below and I will be in touch.