I recently got a text from a client, friend, and blog reader that urged me to do a blog series on preparing for death. My friend felt there was an urgency in the need for education of older and younger folks alike on wills and life insurance. In his opinion, many folks don’t know enough to take care of their families after they pass and he has witnessed how that lack of knowledge can break the family apart. That being said, I have decided to dedicate November’s blogs to the subject of life insurance and December’s blogs to wills and estate planning.
In part due to my friend’s sense of urgency, and because I agree with his assessment, I want to start at the very beginning, so here goes.
What Is Life Insurance?
We all know what we think life insurance is but let’s make sure we are all on the same page. Life insurance is a contract between an insurer and a policy owner. A life insurance policy guarantees the insurer pays a sum of money to named beneficiaries when the insured dies in exchange for the premiums paid by the policyholder during their lifetime. The life insurance application must accurately disclose the insured’s past and current health conditions and high-risk activities to enforce the contract.
Many different types of life insurance are available to meet all sorts of needs and preferences. Depending on the short- or long-term needs of the person to be insured, the major choice of whether to select temporary or permanent life insurance is important to consider. And I want to go over that with you as well.
Term Life Insurance
To start with, term life insurance lasts for a specific number of years, you get to choose the term, and then it simply ends. Some of the more common terms you can choose from for your term life policy are 10, 20, or 30 years. When you consider purchasing term life insurance, you want to make sure you are looking for a policy that balances affordability with the long-term financial strength of the company. There are three different types of term life insurance, and those are decreasing term, convertible term, and renewable term. Let’s start with renewable-term life insurance policies.
Renewable term life insurance means that you get a quote for the year you purchase the policy, but in the years following, your premiums will increase annually. Renewable term life is usually the least expensive term insurance you can purchase, at least in the beginning. Next, there is decreasing term life insurance which is renewable term life insurance with coverage decreasing over the life of the policy at a predetermined rate. So the premium increases, but the coverage decreases. The third type of term life insurance is convertible term life insurance which allows policyholders to convert a term policy to permanent insurance. So let’s talk about what permanent life insurance is.
Permanent Life Insurance
Permanent life insurance stays in force for the insured’s entire life unless the policyholder stops paying the premiums or surrenders the policy. Because of this, it’s typically more expensive than the term. There are several types of permanent life insurance: whole life, universal life, indexed universal life, and variable universal life.
Whole life insurance is a type of permanent life insurance that actually accumulates cash value. This means you can use the cash value of the policy for all sorts of things. For example, it can be used like a loan or cash, or you can even use it to pay the premiums on your whole life policy. Next, there is universal life which is permanent life insurance with a cash value component that earns interest. These policies have flexible premiums, but unlike term life and whole life, the premiums can be adjusted over time and designed with either a level death benefit or an increasing death benefit. Then there is indexed universal life insurance which is a type of universal life insurance that allows you to earn either a fixed or equity-indexed rate of return on the cash value component of your policy. And finally, there is variable universal life insurance. This type of permanent insurance allows you, the policyholder, to invest the cash value of your policy in an available separate account. These types of policies also have flexible premiums, and you can even design your policy to have a level or increasing death benefit.
These are the basics of life insurance that will help make the rest of this month’s blogs more meaningful. Next week, I will start talking about determining your life insurance needs and the factors to consider.
Until next time…
One last thought, I believe an educated investor is an empowered investor. If you like what you’ve read and think your friends and family can benefit as well, please share.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly.
All investing involves risk, including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Dollar-cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.