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Life Insurance is one of the cornerstones of personal finance and the most cost-effective way to plan for your future and the future of your loved ones. However, life insurance is the type of insurance that many people do not give serious thought to until very late in life or when circumstances change(like a life-threatening illness). Despite the universal applicability of life insurance there still remains a great deal of skepticism and confusion.
Life Insurance strategically helps you to fulfill the promises you have made to your family if something unexpected happens and help them cover the costs to replace your income, pay off outstanding debts and mortgages, housing costs, funeral expenses, medical bills not covered by health insurance or planned educational expenses. Life Insurance provides your family with a financial safety net when they need it the most.
Generally, your age and your health are the two main variables of life insurance which determine the premium you will pay. You can purchase a policy at any age, but the younger you are the more affordable your policy will be. There are a number of other variables that can determine the amount of coverage like:
- Whether you are married or single.
- You and your spouse’s age.
- You and your spouse’s future earning potential.
- The number of kids you have
- The amount of debt you have.
It is understandable that you are overwhelmed about life insurance as it is an emotional topic with lots to consider. So, learning about the different types of insurance policies will help you navigate this complex world. There are different types of insurance policies that you can choose from depending on your future goals and family needs.
The three main types of insurance policies include the following:
Term Life Insurance:
If you do not have life insurance presently then term life insurance can be a good place to start because it is the least expensive, simplest and the most widely applicable life option. It provides protection for a limited amount of time (typically 10, 15, 20, 25 or 30 years). It is commonly referred to as “temporary” life insurance as it pays a death benefit only if you die during the specified term of the policy.
Advantages
- You pay for the coverage you need and for the period of time you need it.
- It is less expensive than whole life insurance.
- During the time frame of your policy, the coverage amounts and premiums do not change.
- Current costs are lower than whole life, but it does not provide lifetime coverage.
- It provides you with flexibility as your needs change.
- Your policy can be converted to whole life before your policy term ends without medical underwriting. But, the rates would change depending on the market at time and amount you want your policy to be converted into.
Disadvantages
- The premiums increase as you get older.
- It is not structured to provide cash value.
- Very few (approximately 1%) of term life insurance policies end in a death claim.
- The term policy will stop providing coverage when the policy expires. If you still need insurance or would like to convert your policy into permanent life insurance after 20 or 30 years it will be difficult to secure affordable or appropriate coverage.
- When you are older (after 65) it will become more difficult to secure a term life insurance as the majority of life insurance companies do not provide policies at this age. Even if a company does provide a policy it is often limited and expensive.
Whole Life Insurance
Both term insurance and whole life insurance will pay your beneficiaries a fixed amount of money when you die. The key difference between the two is that term insurance will provide coverage for a fixed period (i.e. 10 or 20 years) whereas whole life insurance is a type of permanent insurance that will stay in force for your entire life, as long as your premiums are paid as specified in the policy. Whole life insurance also helps you build cash value over time. Given below are the advantages and disadvantages of whole life insurance to help you decide if it is the right type of insurance policy for your needs.
Advantages
- Protection for life – It is guaranteed for your lifetime and the coverage amount will not expire or decrease as you get older.
- Level Premiums – The amount you pay for your policy remains level and will not increase over time.
- Cash Value – A part of your premium accumulates on a tax-deferred cash value which works a bit like equity on your home. You can borrow against it to take out a loan, funding a policy or drawing from it for retirement. The amount you borrow is not taxable unless it is more than what you have paid for.
- Guaranteed Death Benefit – The amount your beneficiaries receive is guaranteed.
Disadvantages
- It is much more expensive than term insurance-sometimes much more than 6 to 10 times the cost.
- Many people buy less coverage then they need or end up dropping the policy as they cannot afford it.
- The interest rate on whole life insurance is less than what you would get if you had invested it in other ways.
- It is more complicated than term life insurance and the surrender value changes with time.
Universal Life Insurance
It is a type of permanent insurance with coverage that can last for your lifetime provided the premiums are paid in time. A Universal life insurance policy is characterized by its face amounts, flexible premiums, death benefits, unbundled pricing structure and investing. Universal life insurance can be bought by individuals but it is regularly offered by employers as group universal life insurance. Though universal life insurance is considered as permanent life insurance some policies do not cover you for your entire life, but “mature” at a certain age (commonly 95,101 or 121)
Advantages:
- The biggest advantage that you can get is the lifetime coverage.
- Unlike a whole life policy, a universal life policy is designed to offer more flexibility when it comes to premium payments and death benefit.
- A universal life policy may allow you to pay lower premiums for quite some time or even skip your monthly premiums by utilizing cash value accumulation.
- The cash value of a universal life policy grows at a variable interest rate and could yield higher returns.
- You can see a lot of details such as annual reports, policy expenses, monthly charges, interest earnings, and cash value accumulation. It will help you to see a full breakdown of how the insurance premiums are being utilized and make any necessary adjustments.
- A universal life insurance policy can accumulate a substantial amount of cash over a period of time and you can use it to pay for emergency situations, keep it for retirement or pay for your child’s college.
Disadvantages
- Universal Life insurance policy does not have the guaranteed level premium that is available for whole life insurance.
- Many people buy less coverage then they need or end up dropping the policy as they cannot afford it.
- The fees associated with universal life insurance policy are a huge negative as it will come out from your premium. It is the amount that the insurance company will charge for administration fees, the charge of managing your cash value, mortality cost and agent commissions.
- Variable rates can also mean that interest on cash value can be low.
- A universal life policy needs to have positive cash value so that it can remain active.
One of the benefits of working with Chacha is that we are an independent insurance company and have access to a wide range of life insurance companies. We can survey the market place and through a comprehensive needs analysis determine the best possible life insurance policy to protect you and the people who depend on you.
Contact us today to make the process extremely simple and help you find a life insurance policy that will fulfill your unique needs and goals.
