Learn the differences between term life insurance and permanent life insurance so you can pick the one that's right for you and your family.
According to a 2014 study commissioned by LIMRA, a Windsor, Connecticut-based association that serves the insurance and financial services industries, only about 60 percent of all people in the United States said they were covered by some type of life insurance in 2013, and approximately 25 percent indicated they needed more of that type of insurance.
If you’re among the 40 percent of Americans who currently aren’t covered by some form of life insurance, or if you’ve got life insurance but you need or want more, the information covered below should come in handy.
One of the first, and potentially most important, decisions you have to make while considering life insurance relates to whether you should purchase term life insurance or “whole life” insurance.
Term life insurance covers you for a specific period of time—such as 10, 20, or 30 years. If you pass away during that “term,” your beneficiary or beneficiaries will be paid what’s often referred to as a death benefit. If you don’t pass away during the term, on the other hand, the policy loses its value. (No one is paid anything, basically.)
Whole life insurance, which also is known as permanent or “cash value” life insurance, potentially can cover you for the rest of your life. Also, over time, these policies accumulate a “cash value” that you can borrow against (without being taxed) or withdraw—or you can leave those savings alone and let the entire amount be paid to your beneficiaries after you die.
To make things more confusing, there are a few varieties of term and whole life insurance from which you can choose.
The two types of term life insurance, for instance, are level term and decreasing term. If you buy a level term policy, the benefit will stay the same through the duration of whatever term you select, while if you buy a decreasing term policy, your benefit will drop (often in one-year increments) as the policy ages.
Note: according to the Insurance Information Institute, almost all (97 percent) of the term life insurance policies purchased in the United States are of the level term variety.
There are many more varieties of whole life insurance, including whole life, universal life, variable life, and variable-universal life.
Whole life, also sometimes called “ordinary life,” is the most common of all the permanent or cash value insurance plans and offers a death benefit as well as a savings element that grows based on dividends that the insurance company pays you.
Universal life, on the other hand, adds some flexibility to the whole life model by allowing you to increase your policy’s death benefit (assuming you pass a medical examination) or alter your premium payments (after enough money has accumulated in your account).
Note: as good as the above may sound, it’s important to keep in mind that if you stop or lower your premiums too much and your accumulated savings are used up, your policy may lapse and your life insurance coverage will end.
The main benefit of a variable life policy is that it lets you invest accumulated funds in stocks, bonds, and money market accounts. That means the value of your policy may grow more substantially, and more quickly, than with other whole life plans, but it also exposes you to more risk—as in, you could lose money, as opposed to make money, if your investments don’t perform well and if your policy doesn’t include a guarantee that your death benefit can’t fall below a certain, minimum level.
Finally, variable-universal life policies combine aspects of both the variable and universal life plans mentioned above. Specifically, they allow you to vary premium payments, investments, and coverage amounts like you can with variable life insurance, and they also offer many of the same investment rewards and risks that are associated with universal life insurance.
If you can’t decide between term life insurance and whole life insurance, you could always go with a “blended” policy that combines elements of both entities.
According to U.S. News, such policies “may generate higher near-term cash values and higher death benefits at life expectancy than whole life alone.” Also, blended policies, which are sold by many insurance companies these days, “can be competitive with term policies for some consumers.”
As you can probably imagine, there are positives and negatives associated with both term and whole life insurance policies.
The positives commonly attached to term life insurance:
Term life insurance’s primary negatives are:
Here are some of the positives that tend to go along with whole life insurance:
And as for the negatives that tend to go hand in hand with whole life insurance:
Insurance companies look at a number of different factors in order to classify potential policyholders—each classification pool represents a different level of risk for the provider, and the more risk you represent, the worse your classification and the higher your premium are sure to be—which in turn is used to come up with your life insurance premiums. Among the criteria they consider:
How old you are when you purchase your policy—the older you are at that time, the more expensive your payments are likely to be
Your general health—insurance companies usually obtain this information by reviewing your medical records and by asking questions about your medical history, among other things
Chronic or pre-existing health problems—among the issues that could negatively impact your premium payments or even keep you from getting this type of insurance: cancer, diabetes, heart disease, and various sexually transmitted diseases
Smoking or excessive drinking—these habits can haunt you, and affect your life insurance premiums, even if you don’t currently partake in them, as companies may consider your activity over the last five years when calculating what to charge
Your driving record—this includes the number of accidents you’ve been in as well as any DUI citations, claims, or tickets you may have received
Engaging in dangerous activities—if you spend time flying planes, hang gliding, parasailing, rock or mountain climbing, skiing, or skydiving, for example, you’re probably going to pay more for life insurance than someone who doesn’t
Having a hazardous job—if your occupation is a risky one, insurance companies are likely to consider you a greater liability and, thus, make you pay more for life insurance than someone with a less hazardous job
A few other factors, too—felony criminal activity, military service, and even foreign travel or residency can cause insurance companies to hike your rates
Don’t fret if you’re initially placed in a classification pool that results in you having to pay higher premiums than you’d like.
Adopting new hobbies, changing occupations, and improving your overall health all could help you qualify for a lower rate class in the future, so be sure to revisit your policy and check in with your agent every couple of years to see if you can reapply and save some money on your premiums.
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