Life Insurance

Term insurance

As the name implies, term life insurance provides protection for a specific period of time and generally pays a benefit only if you die during the period. Term periods typically range from one year to 30 years, with 20 years being the most common term.

One of the biggest advantages of term life insurance is its lower initial cost in comparison to permanent insurance. Why is it cheaper when initially purchased? Because with term life insurance, you’re generally just paying for the death benefit, the lump sum payment your beneficiaries will receive if you die during the term of the policy. With most permanent policies, your premiums help fund the death benefit and can accumulate cash value.

Term life insurance is often a good choice for people in their family-formation years, especially if they’re on a tight budget, because it allows them to buy high levels of coverage when the need for protection is often greatest. Term insurance is also a good option for covering needs that will disappear in time. For instance, if paying for college is a major financial concern but you’re pretty sure that you won’t need life insurance coverage after the kids graduate, then it might make sense to buy a term policy that’ll get you through the college years.
But what happens if you buy a term policy only to realize at the end of the term that you still have a need for life insurance? Well, it’s sort of a good news, bad news story. The good news is that many policies will give you the option to renew your policy when you reach the end of the term. The bad news is that you’ll probably face much higher costs since age is one of key factors used to determine life insurance premiums. To renew the policy, you also may have to present evidence of insurability (that’s insurance jargon meaning, “take another medical exam and answer a new round of questions about your lifestyle, health status and family history”). If you’re still a fine specimen with healthy living habits, you might requalify at a reasonable rate. But if your health has deteriorated, you may find that with continually increasing premiums it’s too expensive to renew your policy or you may not even qualify for life insurance.
So if you’re considering a term policy, make sure you carefully consider how long you’ll need the coverage. If you’re pretty sure that your needs are temporary, then term insurance may be an excellent choice. But if you think there’s a real possibility that you might need the coverage for a long time, then remember that if you want to renew your term policy after it expires or buy a new term policy at that time, your age, health status or other factors may make coverage very expensive.

To better understand term insurance, consider this analogy. When you purchase term insurance, it’s sort of like renting a house. When you rent, you get the full and immediate use of the house and all that goes with it, but only for as long as you continue paying rent. As soon as your lease expires, you must leave. Even if you rented the house for 30 years, you have no “equity” or value that belongs to you. One exception to this rule is what’s called a return-of-premium term policy. With these policies, if you keep the policy in force for the entire term, say 20 years, the insurance company will refund the premium payments you made over that 20-year period. Of course, there is a price to be paid for this added benefit. The premiums for return-of-premium policies are considerably higher than premiums for standard term policies. The price difference can be 30%, 40% or more. Another factor to consider is that term insurance rates have dropped considerably over the past decade, mostly because people are living longer. If you own a standard term policy, there’s really no harm done in dropping that policy in favor of a newer and cheaper term policy. But if you own a return-of-premium policy, dropping the policy before the full term has expired means that you will have paid a high price for your term insurance coverage and the premiums you paid won’t be refunded.

When considering a term purchase, one thing to keep in mind is that not all term policies are the same. Some may include certain provisions as standard features, while others may require you to pay extra to add these features as “riders” to your policy. So if you are comparing term policies, remember that price is not the only factor to consider. Ask your agent about provisions such as accelerated death benefits, disability waiver of premium, and accidental death benefits.

Another provision that is very important is something called convertibility. This valuable feature is usually available in the first few years of the policy, and allows you to convert your term policy to a permanent policy, such as whole life insurance without submitting evidence of insurability. Being able to convert to a permanent policy is a great option to have in the event that circumstances in your life change such as failing health or maybe just the realization that coverage is needed for a longer period of time than you originally anticipated. That’s why when purchasing a term policy, it’s never a bad idea to find out what kind of permanent policies are offered by the company you are considering. Some companies may only have strong term insurance offerings, while others may have very competitive products in both categories.

Here are some important questions to ask yourself when considering a term life insurance policy:

How long can I keep this policy?
If I want the option to renew the policy for a specific number of years or until a certain age, what are the terms of renewal?
When will my premiums increase? Annually? Or after a longer period of time, such as five, ten, or twenty years?
Can I convert to a permanent policy? If so, how many years will this option be available to me and will I need a medical exam if I want to convert?

Permanent insurance

Permanent insurance provides lifelong protection. As long as you pay the premiums, the death benefit will be paid. These policies are designed and priced for you to keep over a long period of time. So if you don’t intend to keep the policy for the long term, this may be the wrong type of insurance for you.

Why would someone need coverage for an extended period of time? Because contrary to what a lot of people think, the need for life insurance often persists long after the kids have graduated college or the mortgage has been paid off. If you died the day after your youngest child graduated from college, your spouse would still be faced with daily living expenses. And what if your spouse outlives you by 10, 20 or even 30 years, which is certainly possible today. Would your financial plan, without life insurance, allow your spouse to maintain the lifestyle you worked so hard to achieve? And would you be able to pass on something to your children or grandchildren?

Another key characteristic of permanent insurance is a feature known as cash value or cash-surrender value. In fact, permanent insurance is often referred to as cash value insurance because these types of policies can build cash value over time, as well as provide a death benefit to your beneficiaries.

Cash values, which accumulate on a tax-deferred basis just like assets in most retirement and tuition savings plans, can be used in the future for any purpose you wish. If you like, you can borrow cash value for a down payment on a home, to help pay for your children’s education or to provide income for your retirement. When you borrow money from a permanent insurance policy, you’re using the policy’s cash value as collateral and the borrowing rates tend to be relatively low. And unlike loans from most financial institutions, the loan is not dependent on credit checks or other restrictions. You ultimately must repay any loan with interest or your beneficiaries will receive a reduced death benefit and cash surrender value.

If you need or want to stop paying premiums, you can use the cash value to continue your current insurance protection for a specified time or to provide a lesser amount of protection covering you for your lifetime. If you decide to stop paying premiums and surrender your policy, the guaranteed policy values are yours. Just know that if you surrender your policy in the early years, there may be little or no cash value.
With all types of permanent policies, the cash value of a policy is different from the policy’s face amount. The face amount is the money that will be paid at death or policy maturity (most permanent policies typically “mature” around age 100). Cash value is the amount available if you surrender a policy before its maturity or your death. Moreover, the cash value may be affected by your insurance company’s financial results or experience, which can be influenced by mortality rates, expenses, and investment earnings.

If you are the kind of person who likes premiums that will remain fixed and predictable over time, you may want to consider:

Whole Life or Ordinary Life

This used to be the most common type of permanent insurance. It provides you with the certainty of a guaranteed amount of death benefit and a guaranteed rate of return on your cash values. And you’ll have a level premium that is guaranteed to never increase for life.
Another valuable benefit of a participating whole life insurance policy is the opportunity to earn dividends. While your policy’s guarantees provide you with a minimum death benefit and cash value, dividends give you the opportunity to receive an enhanced death benefit and cash value growth. Dividends are a way for the company to share part of its favorable results with policyholders. When you purchase a participating policy, it is expected that you will receive dividends after the second policy year – but they are not guaranteed. Dividends, if left in the policy, can provide an offset (and more) to the eroding effects of inflation on your coverage amount.

While some people like the predictability of fixed premiums, others prefer adjustable premiums because they like having the option to make higher premium payments when they have extra cash on hand or lower ones when money is tight. If you find this kind of flexibility appealing, you may want to consider:

Universal Life

This type of permanent insurance generally allows you, after your initial payment, to pay premiums at any time, in virtually any amount, subject to certain minimums and maximums. You also can reduce or increase the death benefit more easily than under a traditional whole life policy. This type of flexibility has made universal life more popular for one’s changing life circumstances. With universal life, you get the certainty of a guaranteed minimum amount of death benefit, as long as premiums are sufficient to sustain that death benefit. Any guarantee relies on the claims paying ability of the issuing insurance company. As such, do your homework and select a financially sound company. Most universal life policies will also provide a guaranteed rate of return on your cash values, with one important exception. It is possible that you will not accumulate any cash value if any, or all, of the following circumstances occur: administrative expenses increase, mortality assumptions are changed, the insurance company’s investment portfolio underperforms, premium payments are insufficient.

Variable Life and Variable Universal Life

These types of insurance are offered via a prospectus and provide death benefits and cash values that vary with the performance of a portfolio of underlying investment options. You can allocate your premiums among a variety of investment options offering different degrees of risk and reward: stocks, bonds, combinations of both, or a fixed account that guarantees interest and principal. Overall, variable life is an option for people who want to combine life insurance with a higher potential for investment return with a higher risk. For more complete information, make sure to request the appropriate product and fund prospectuses when consider a company as it will contain information to consider such as the investment objectives, risks, charges and expenses of the investment.

Frequently Asked Questions

Q: What’s the difference between term and permanent life insurance?
A: A term policy is temporary – it will remain in effect for a limited time. Annual renewable term policies are very economical in the
beginning but increase each year as you age. With a level term policy, you can lock in your rates for a specified number of years
ranging from 1 to 30 years. Permanent policies, including whole life, variable life and universal life insurance, offer lifetime coverage
and tax-deferred, cash-value accumulation. Whole life premiums are guaranteed to remain level for the life of the policy; with universal
life policies, you can vary your premium payments as your needs change.

Q: What happens if an insurer finds out a policyholder wasn’t truthful on a life insurance application?
A: The worst case scenario is under certain circumstances, your policy could be voided if you fail to disclose a material illness or omit
other material information. If this were the case, then your beneficiary would be refunded only the premiums paid prior to your death.
With respect to omissions or misstatements made in an application, after it has been in force for a period of two years from the date of
issue, the policy is not contestable.

Q: My spouse has decided to purchase life insurance and says I need some too. Do we both need life insurance?
A: If your death – or your spouse’s – would leave your family in a financially challenging position, then life insurance for the both of you
would be appropriate. Consider the remaining partner’s financial situation without you there. Whether it be routine expenses or big
ticket items such as the mortgage or a college tuition, life insurance can help offset these expenses. If one of you is a stay at home
parent, life insurance can help replace lost income essential to continuing to be at home during the early years of a child’s life or provide
assistance for childcare while a parent prepares for re-entering the workforce.

Q: I’m single. Do I need insurance at this stage of my life?
A: Do you have assets you would want to protect in the event of a major unforeseen catastrophe? Do you have dependents who rely on
your income? First, you may want to consider major medical because an unforeseen catastrophe could wipe out your financial health
as well as your physical health. Second, you may want to consider disability insurance which would replace a percentage of your
income until you are back on your feet.

Q: I’ve heard references to “preferred” life insurance rates in advertisements. What does the term mean and who qualifies?
A: Life insurance companies underwrite and evaluate applications and “preferred” translates to a better rating and lower costing policy. In
general, those are reserved for the top 10% of applicants and insurance companies take into account an applicant’s risks, health,
family health history and tobacco usage. Each insurance company has their own guidelines and a skilled professional can assist by
finding the best policy based on your unique situation.

Q: When reading about life insurance or other types of insurance, I sometimes run across various industry ratings. Just what are these
ratings and what do they mean to me?

A: Ratings are an important consideration when evaluating carriers. Ratings are an objective way to determine a company’s stability and
financial strength. Ratings are based on many factors, including profitability, management practices, asset quality, adequacy of
reserves and capitalization and claims paying ability.