Life insurance is something that is vital for every adult, and some children. Life insurance provides a death benefit when one is needed most, when someone has died. There are multiple types of life insurance including term, universal life and whole life. Within those broad categories there are certain subsets like annual renewable term insurance, variable universal life insurance, indexed universal life insurance, blended whole life insurance etc. I try to help people understand how much and what kind they might need to research.
The reality of life is that it can be really confusing and complicated sometimes. Also, all of us have our expiry date, meaning that we have to leave our loved ones someday. It may be hard to swallow for some people, but you better think about it one way or another.
As we think more of our loved ones and what can happen to us during fateful days, there’s one thing that can help ease those worries.
It’s this reality that merits the existence of life insurance, which is indeed important if you don’t want your exit to be entirely wasteful. But it’s not as easy as just getting one and being done with it.
There are different types of life insurance, each with its own conditions and advantages. Finding out which one is best for you is the crucial first step; you need to know just how much life insurance you really need.
Whole Life Insurance
This is pretty much life insurance that most people would think of. Its coverage is life with guaranteed cash value and death benefit, and it’s on a fixed premium. Once you get whole life insurance, you can’t have it revoked, reduced, or canceled except in cases of not paying or outright fraud.
What makes whole life insurance enticing is its certainty and additional benefits. Some of the money you put into a whole life insurance policy can go towards a savings program, which then earns interest or is allocated to other investments. It has guaranteed annual growth of your money, which makes for a great deal overall.
Also, since it’s supposed to be lifelong, it has principal protect guarantees on your money so it’s not subject to market losses. This type of insurance is best for those who have both family and the money to afford it, so long as loved ones will get what was paid for out of it when the critical time hits.
Other Helpful Resources with Regard to Whole Life Insurance
I know the topic is controversial but I am a big proponent of whole life insurance writing about it often throughout the history of this blog:
- Why I own whole life insurance on my child (and then my second child)
- Buying Life Insurance Even When You Don’t Have a Spouse or Children
- Understanding a Blended Whole Life Policy
Term Life Insurance
What term life insurance offers is death benefit without cash value, which could be good for most people. Its coverage is a temporary period of time ranging from 10 to 30 years, depending on what you get. Since it’s temporary, you won’t get as much of the advantages that you get from whole life insurance policy.
Perhaps the disadvantage here is that if you wish to have the same level of protection after the initial term is over, premiums may increase substantially. It’s best to need the policy only within that initial period and not have to deal with that premium increase later on or somehow be able to afford it later on. But if you go for the latter, maybe you should consider whole life insurance anyway.
There are various reasons to go for term life insurance policy, most of which is the need for insurance but not being able to afford a whole life one. It’s said that if you’re below 40 years old and don’t really have a genetic disposition for a life-threatening illness, then term life insurance should be just fine.
Universal Life Insurance
Also known as “adjustable life insurance,” this type of life insurance can be quite appealing due to the ability to vary the amount of the premium, making it a flexible policy. It made possible by using part of your accumulated earnings to cover part of the premium cost, and you can even vary the amount of the death benefit.
Its total cost falls in between the previous two; it costs less than whole life insurance, but costs more than term life insurance. You do get two options for the death benefit—fixed amount or increasing amount equal to face value of the policy plus your cash value amount. There’s also a way to change the amount and frequency of premium payments.
The price for that kind of flexibility is having higher administrative fees to pay for, which can really add up over time. But if you want a permanent life insurance policy that gives you and your family that long-term security that’s so important while still having the ability to regulate your coverage to have it adapt to your current condition, then this could work for you.
Investopedia has a great primer comparing Permanent Life Policies: Whole vs. Universal.
Index Universal Life Insurance
It’s a subtype of universal life insurance that has its earnings linked to a financial index instead of the cash account. It’s basically what you get if you want your life insurance to play the stock market.
You do get permanent death benefit and flexibility while enjoying lower premiums since you’re taking the brunt of the risk. However, it is a very risky product and a professional should explain the Pros and Cons of Indexed Universal Life Insurance.
Survivorship Universal Life Insurance
It’s another subtype of universal life insurance that covers two people and pays a benefit only after both have passed away. It’s basically like a package deal since it’s cheaper than two individual permanent policies, so it’s a more affordable option for couples who want to leave something behind for the rest of their family in due time.
Variable Universal Life Insurance
This is pretty much the most expensive type of life insurance policy of the bunch because it can build up a cash reserve that can then be invested somewhere else within that insurance company. The value of the cash reserve depends on the performance of the investments, which means that it’s dependent on current economic conditions.
It’s great when you have it during a time of economic growth, and quite bad during times of recession. That makes this form of life insurance quite risky. You also get the flexibility of straight-up universal life insurance, so you can adjust it according to your current condition, but that also adds more to the overall cost.
Despite that, it does have guaranteed death benefit, which any life insurance policy can never be without. It shouldn’t fall below the minimum amount even if investments devalue significantly. But that also means you’ll have to pay extra premiums for that death benefit.
Minimum cash value is far from guaranteed with this form of life insurance due to how poor investment performance can potentially diminish your entire cash value. Therefore, this is for those who are feeling particularly lucky. As a combination of variable and universal life insurance, you get the best of many worlds, but only if you have money to burn.
Whichever type of life insurance policy you decide to get, do know that you’re taking a step towards responsible use of your hard-earned money by getting one. This is one of those things in life that you have to think really hard about, but do know that there’s much to be gained when you do go for one that’s absolutely right for you.