Life insurance exists to help provide a safety net for your family if you were no longer around, which makes it one of the most selfless gestures you can make. The proceeds of a policy offer valuable financial comfort to help your family cover bills like the mortgage, childcare, and other day-to-day expenses.
It’s a simple transaction: In exchange for this protection, you pay premiums to your insurance company.
Where life insurance can become complicated, however, is when it comes time to pick the right policy. Here, we’ll explain the different types of life insurance coverage that exist to help you determine what’s the best fit for your family.
Term life insurance
Our personal favorite and the only one we offer at Haven Life is term life insurance. This type of coverage is simple to understand, easy to buy and provides dependable coverage at an affordable price. A healthy 30-year-old man can buy a 20-year, $500,000 Haven Term policy, issued by MassMutual, starting at $21 per month.
As the name conveys, term coverage lasts for a specific amount of time — typically 10, 15, 20 or 30 years. Once the term length is up coverage ends, or you can renew it, but at a higher price.
Why is term life insurance a popular choice? Because it offers coverage during the years your family needs it most and at a reasonable price. Depending on the term length and amount of coverage you purchase, it could offer protection until the mortgage is paid off, your partner is retired, or the kids are adults. If you need help figuring out the right amount of coverage and term length for you, a free online calculator can help take out the guesswork.
Term life insurance itself comes in a few varieties, so if you think it may be the right choice for you, here’s what you should know.
Medically underwritten term life insurance
Again, the only coverage we offer at Haven Life, this common type of policy takes into consideration your health history, family history, and lifestyle to personalize pricing to you and only you. Often, a medical exam is required to finalize coverage. But, there are cases with Haven Term applicants where a medical exam isn’t needed. However, it’s very important to be honest when completing the application because the issuance of the policy or payment of benefits may depend upon the truthfulness of the answers given.
If you’re reasonably healthy, a medically underwritten policy is usually going to be a better value because the pricing is for you and only you, and the life insurance company doesn’t need to charge more because of assumptions it could be making about your health.
Simplified issue term life insurance
Simplified issue policies offer term coverage without a medical exam. Because no medical underwriting is conducted, these policies are usually at least several times more expensive than a medically underwritten policy. For example, according to the site Termlife2go, that same healthy 30-year-old man could buy a 20-year, $500,000 simplified issue policy starting at about $60 per month. Trustage limits coverage to $300,000, which would cost $95 per month.
When is a simplified issue policy a good choice? It might be right for you if you suffer from chronic health issues that disqualify you from medically underwritten coverage. Simplified issue is a popularly marketed “completely online” term life insurance. When shopping for a policy online, you’ll want to ensure you’re buying the one you really want – whether that be simplified issue or medically underwritten. Typically the simplified issue policy has smaller, limited term lengths and if it costs much more than other quotes you’ve gotten. (More tips on what to watch for when buying a policy online here.)
Return of premium policies
One of the biggest gripes people have about insurance is that you’re paying premiums for a “what if” scenario. And, in almost all cases, you hope the worst case scenario won’t happen. But, where do all those premiums go? The answer is: to the insurance company… unless it’s a return of premium policy.
A return of premium policy, which in some cases can also be an optional rider that’s either available for a fee or is included as part of a term insurance policy, refunds premiums paid if you outlive the term of your policy. Generally, if you purchased a 30-year term life insurance policy, for example, and lived beyond the duration of the policy, most or all of the premiums you paid get reimbursed to you. Yes, that’s a lot of money coming back your way — but RoP riders often raise the price of your premiums significantly for this feature.
Let’s do a cost comparison.
Our healthy 30-year-old gentleman could pay anywhere from $90 to $100 per month for a RoP, 20-year, $500,000 policy according to State Farm and Policygenius quote tools.
Keep in mind, you do get all or most of that money back at the end of the term. Some think of it as forced savings, some see it as letting an insurance company earn money on your money instead of you. Additionally, if you let the return-of-premium policy lapse before the term ends — due to canceling or no longer paying premium payments — you usually can’t reclaim the premiums you’d already paid. It works only at the end of the coverage term of the policy.
Maybe that’s why, according to LIMRA, return of premium policies only represents a small fraction of term life sales.
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Lifelong coverage: permanent life insurance
If you want life insurance that lasts the rest of your life, then permanent life insurance may be the right choice. Permanent life insurance comes in a few varieties – the most common being whole life and universal life. Unlike term, permanent policies provide coverage for a lifetime and include a cash value component that can grow or decrease over time.
These features are why permanent policies can cost anywhere from 5 to 20 times more than a term life policy. Due to the significant difference in premium costs, permanent policies can be less affordable for younger, cost-conscious families. Or, it can cause people to get less coverage than they need due to what they can afford.
When you pay for a permanent life insurance policy, part of the money keeps your protection in place just like a term policy would do. And for some permanent policies, another part of your payment goes into a cash value feature.
This cash value component builds each year with each payment you make, so over time, your whole life policy will become more valuable. The policyholder may access their cash value, through partial surrender or loans, for any reason such as emergencies or to help supplement their retirement income. You should know that accessing cash values through borrowing or partial surrenders will reduce the policy’s cash value and death benefit, increase the chance the policy will lapse and may result in a tax liability if the policy terminates before the death of the insured.
Whole life policies have long-term implications on your financial plans, so we recommend you consult a financial professional before buying a whole life policy. If you are interested in the benefits of this type of policy, our parent company, MassMutual, has agents who would be glad to help.
Permanent life insurance policies come in several varieties with distinctions that are important since they will directly impact your premiums, coverage, and the overall complexity of managing the product.
Level whole life
One of the most popular types of permanent life insurance, whole life insurance policies feature a coverage amount and a level premium that won’t change during the life of the policy. This type of policy has the potential to accumulate cash value over time.
Whole life coverage requires medical underwriting, which means your insurance company will ask questions about your health, your family’s health history, and your lifestyle and occupational choices in order to determine eligibility and pricing.
To get an understanding of pricing for permanent policies, State Farm would offer our healthy 30-year-old male example a $500,000 policy starting at about $460 per month. It’s lifetime coverage with a cash value component… but it’s also 20 times more per month than a term life policy. Of course, if you wish to continue a term policy after its term ends, you would be faced with much higher premiums.
Universal life insurance
Like whole life insurance, universal life is permanent coverage, and it accrues cash value over time. But a key distinguishing feature of universal coverage is that it offers flexible premiums that may allow you to adjust how much you pay each year. You will need to, at least, pay the minimum premium amount of the policy per month – either through premiums or through the policy’s account value – or coverage will end.
Universal coverage is more complicated than whole life — with more moving parts.
For example, with a universal policy, you can adjust your death benefit (and with it your premiums) during the life of the policy.
This can be a convenient feature later in life when you don’t need as much coverage or if you no longer can afford the policy’s original premiums. This feature just scratches the surface of the customizations a universal policy can offer.
When you buy a policy, the insurance company provides a minimum guaranteed interest rate which will be applied to your account value. However, if the insurer’s portfolio earns more than the minimum interest rate, the company may credit the additional earnings to your policy. This is why universal life policies have the potential to provide more account value accumulation than a whole life policy some years, but less in other years.
Indexed universal insurance
With an indexed universal policy, the cash component of the policy is tied to the performance of a predetermined stock index, usually the S&P 500 or the Dow Jones Industrial Average. If the stock market makes gains, your policy could increase in value along with it.
Your policy contract will clearly identify how much you could benefit from stock market gains. An indexed policy may guarantee against losses but cap any gains beyond a certain level. Or your policy’s account value may only participate in a certain percentage the performance of the index it’s tied to. For example, if your policy has an 80 percent participation rate, 5 percent annual increase in the index would result in only a 4 percent increase in your policy’s account value.
These are factors that you’d want to discuss with your financial professional if you were considering an indexed universal policy.
Variable universal coverage
In a variable universal life policy, the policyholder chooses investment accounts in which his or her premiums are allocated. As with any type of investing, it’s possible to see significant earnings or losses.
This kind of policy requires constant attention since the market changes quickly. For example, if the accounts in which the premiums are invested drop significantly, the loss of account value could jeopardize the policy’s death benefit, meaning the policy would no longer fulfill its core purpose of providing coverage to the policyholder’s beneficiary.
For applicants who are older or not in good health, a guaranteed issue policy may be their only option for coverage.
Guaranteed issue works as the name implies and offers lifelong coverage like other permanent policies. All applicants are guaranteed approval on coverage, but that comes with some caveats.
Guaranteed issue policies typically have a death benefit maximum of around $50,000 or less and come with a high premium. Because anyone can get them, regardless of their current health, the risk pool is significant for insurers. And because the average policyholder risk is high, premiums are high for lower coverage amounts.
Protection comes in so many forms
If you have a partner, child, or family member who relies on your income for their financial health, then you probably need life insurance. There are numerous types of coverage available, which cater to different budgets, financial needs, and even health statuses so that anyone can find the right coverage for them.
Term life insurance is often a good choice that appeals to people who want affordable coverage to last for a specific time period, such as until their loved ones are no longer financially dependent upon them.
If you want coverage for the rest of your life along with the ability to build additional cash value within your policy, a permanent policy can offer that. And, there are many agents and companies you can work with to select the right policy for you.
That said, buying the right coverage does not need to be complicated. Consider what price fits into your budget as well as kind of role you want life insurance to play in your financial plan. And, most importantly, don’t lose sight of the fact that you’re doing all this research and buying a policy to help financially protect the most important people in your life.
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