If you’re searching for a life insurance policy you may have realized that some of this stuff can be rather complicated. So in this article I’ve put together a small guide for you to reference to help you. In this aritcle I’ll be covering breifly how each policy works, the benefits, disadvantages, and who the policy will benefit most.
Term Life Insurance
How it works: Term life insurance gives you coverage for a specific amount of time. Typically lasting from 10 to 30 years in length. Their are several types of term any of which can be mixed and matched.
You have guaranteed level term which give you level premium payments that will never change. You have return of premium life insurance and finally you have convertible term life insurance. To learn more about term insurance read my article on how does term life insurance work.
Benefits: Term is usually a little easier on the wallet than most other types of life insurance. On top of that you can set the policy up cover you only for as long as you need it.
Disadvantages: Term can get fairly pricy is you have to renew your policy. On top of that term can almost be like paying rent for an apartment, once the term is up you won’t have anything to show for all the money you put into it.
Who this policy is for: This policy makes a great fit for those that are older, since they will general face higher cost because of old age and health related risk. On top of that it also makes a great fit for those that have health issues such as diabetes.
Whole Life Insurance
How it works: Whole life insuance does just what it says, it last your entire life. However with this type of policy it contains a cash value account that helps lower the cost of insurance over time. Check out my article on Whole Life Insurance Explained to learn more.
Benefits: The big benefit of this policy is that you will have coverage your entire life and when you pass away, so you won’t have to worry about the financial concern you could pass on to your loved ones. On top of that it the cash value account which will lower you total cost of insurance over the long run.
Disadvantages: On the other hand with whole life insurance you will be required to pay your premium payments every month and if you fail to make your payments it will lapse.
Who this policy benefits: This policy benefits those that want to have a policy that will always be their for them until they pass away. This makes it especially good for those that are younger since they will have more time for the cash value account to build up.
Universal Life Insurance
How it works: Universal life insurance works very similar to whole life but with one big difference, it’s flexible. This means that if you would happen to miss a couple of payments the policy would just deduct them from the cash value until the account runs dry.
Benefits: This type of policy is more flexable and offers a fixed interest rate. In fact the typical interest rates I’ve seen from Western Reserve Life have averaged around 3% to 5%.
Disadvantages: The interest rates for the cash value account are never usually fixed, and can fluxuate. However they are guaranteed not to lose value though.
Who this policy benefits: This type of policy benefits those that want something that will be around for their entire life. On top of that it also works great for those who might get in a pinch with their finances, and will allow them to miss a few payments.
Indexed Universal Life
How it works: Indexed universal life works very similar to universal life but with one difference, the cash value account is invested in an index, typically the S&P 500. With a universal life policy it’s only invested in the insurance company itself but by being in an index fund like the S&P 500 it has a better chance of seeing a bigger return.
Benefits: The big benefit with this account is higher returns and that the account is guaranteed not to lose value. In fact an indexed universal life policy can usually earn no less than 0%.
Disadvantages: This life insurance option caps the return you can earn, in fact the highest typical policies can reach is around 8%. So if the index fund gets a return of 12% you will only get 8%. On top of that most companies don’t include dividends as well. So any extra earning you would make from stocks that produce dividends within the fund will not be included.
Who this policy benefits: This policy benefits those who would like to earn higher returns in their cash value account to cut down the cost of insurance more, while also cutting down the risk involved by invest you money in an index fund.
Variable Universal Life
How it works: Again this option works the same as a universal life policy by being flexible but instead of investing in a fixed or indexed account it invest the cash value into sub-accounts that are invest in the stock market, working very similar to a mutual fund.
Benefits: This policy has the potential to earn big returns by investing into the stock market. These policies allow you to pick from many different sub-account options available, in fact some companies even offer asset allocation models to simplify the process.
Disadvantages: The risk of being in the stock means you could face some volitility and even lose money in your cash value account.
Who this policy benefits: This policy is great for those who are younger and want to earn big returns in their cash value account. In fact if it earns enough the cash value account could essentially cover all the premiums payments, however you will want your insurance agent run a few illustrations to see if this is possible for you. Finally I should also mention that this is not life insurance for elderly people. In fact most older people will probably have a hard to getting a policy like this because of the risk involved with investing your money in the stock market.
So their you have it, the best life insurance options. Before you consider any of these options take some time to talk to your insurance agent to see which options fits you best.
Questions or Comments? You know what to do.