All of the various forms of life insurance – whole life, term life, variable life, universal life, and the dozens of variations of each – can be distilled down to just two types: Term and Permanent.
As the name would imply, term is life insurance that offers coverage for a number of years. Think of term life insurance like auto or homeowners insurance, you pay a premium and should you have an accident, it will pay a death benefit. If you do not have an accident (i.e. die during the term), nothing will pay out. Also like auto or homeowners insurance, term life insurance does not have cash value that builds up inside the policy. You are simply buying protection.
If you’re considerations are paying the lowest possible premium for the most coverage, and only need life insurance for a number of years (i.e. until your children are out of the house), term is your best choice.
Many term life insurance policies have a conversion feature. We see a benefit in having this feature should your health deteriorate towards the end of your term and you would like continue coverage. In converting a term life insurance policy, you are actually changing it from term to permanent. The premium will be much higher reflecting the change. However, the basis for your underwriting class will be what you originally received. For example, say you received a preferred underwriting class when the policy was taken out. Now you have a serious illness and would never be able to get life insurance. The carrier allows you to convert the policy at the preferred underwriting class based on your current age. Think of this as underwriting protection on your health to be able to get life insurance in the future.
Term life insurance is not designed to pay off. The life insurer knows the likelihood of you dying before your life expectancy, is very low. In fact, statistically, there is only a 1 percent likelihood that a death benefit is paid during the term. That is why life insurers can charge so little for term policies.
Permanent Life Insurance
If you think your need for life insurance will extend beyond 10, 20 or 30 years, the most cost effective way to own life insurance may be with a permanent, cash value policy.
Permanent life insurance, also referred to as cash value life insurance, is designed to provide protection for your whole life. As long as the premium payments are made, it will continue to provide protection and it can never be cancelled.
We find permanent life insurance a fit for high net worth individuals when…
- They have a taxable estate and prefer liquidity rather than having to sell assets
- Want to diversify their assets
- Want to provide a legacy for their loved ones or charity
Which type of coverage is right for you depends on several factors…
- The purpose or role life insurance plays into your financial plan
- How much coverage you need
- How long your need will last
Life Insurance has a place in most plans. But you need to understand how it fits in and what your options are before making such an important decision.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.