Which Makes Sense for You: Permanent or Term Life Insurance?
In a very broad sense, there are two types of life insurance:
- permanent life insurance and
- term life insurance.
Which is right for you?
The answer depends on what you’re trying to accomplish by having a life insurance policy. Are you insuring your life so that when you pass away your children will be able to go to college and your spouse will be able to pay off the mortgage? These are temporary concerns and so a temporary form of life insurance - term life - is best suited to address them.
However, if you are concerned about providing income to a widow or widower for life, funding retirement, or passing wealth to a future generation then you will find that permanent life insurance is better suited to address these goals.
Always ask yourself why you need your life insurance policy. If it’s for a temporary goal, then term insurance is probably best. If it’s to address a long-term need or concern, then it’s time to start looking at permanent policies.
Burial and Final Expense Insurance
Why You May Want to Consider Burial Insurance and Final Expense Insurance
People who have lost a member of their family know how difficult loss can be. The emotions are overwhelming. However, often, there isn’t time to grieve because you need to quickly begin to deal with the financial implications.
The cost of a funeral can add up quickly. The last thing you or your family needs is to worry about is if you will be able to cover the funeral expenses. That is why planning ahead is critical.
Burial insurance or final expense insurance is a basic life insurance policy that typically covers people until they reach the age 100. It is an easy insurance to obtain, much simpler than complicated whole life or term policies. Depending on the policy, burial insurance or final expense insurance helps your family cover the expenses of a funeral and potentially other outstanding expenses.
Besides a sense of comfort that a final expense insurance policy can offer, it offers never changing premiums and permanent coverage making it a wise decision for your future.
Expensive funerals
Funeral costs can add up, especially if you consider the:
- Funeral service
- Cemetery plot and headstone
- Cost of casket
- Funeral procession
Miscellaneous costs
These costs can quickly add up, making burial insurance a smart and pre-emptive decision. Don't make your loved ones worry about costs when the only thing they should worry about is grieving.
Call today to learn about burial insurance or final expense insurance policy so your family doesn’t have to worry about it tomorrow.
Life Insurance Policies and Cash Value
Cash value is an attractive part of many permanent life insurance policies. When the cash value inside a life insurance policy builds up, you may take a loan or a withdrawal from the cash value, subject to provisions of the life policy, that can help you with expenses.
Only permanent life insurance policies can build cash value, so that means if you are looking for a life policy to build cash value, you may want to investigate whole life or universal life policies.
Whole Life policies allow you to have a cash value that builds slowly but steadily as long as you pay your premiums on time. As the cash value increases, you’ll see it grow too - so it pays to be patient!
Universal life policies also build cash value, but they do so in a little more complicated way. The value inside of a universal life policy is usually not guaranteed, which means you may receive more cash value than expected - or you may get none at all. If you want a life insurance policy that may build cash value that you can access while protecting your family, talk to us about overfunding - paying slightly more than the normal premium in order to increase your cash value. Just like a whole life policy, the larger the cash value gets the faster it grows. So, taking advantage of the flexibility of a UL plan by overfunding means you may receive more cash value!
Navigating Life Insurance
Term Life Insurance
Term Life insurance is life insurance that you pay for during a specified length of time or term – generally one to 30 years. You select the amount of the death benefit or face amount to meet your needs.
Premiums, or payments, which can be the same amount or increase with time, must be made monthly, quarterly, semi-annually, or annually. If you die during the term of coverage, the face amount of your policy will be paid to your beneficiaries. Term insurance policies do not accumulate cash value and therefore usually offer lower premiums than other life insurance products with the same face value.
Universal Life Insurance
Universal Life is permanent insurance that has the potential to accumulate cash value. However, it offers additional features and options. For example, you can increase or decrease your policy's face amount to accommodate your changing protection needs. You can also increase or decrease the dollar amount of your premium payments and make additional lump sum payments to your policy. Since a Universal Life policy accrues cash value, you can borrow against this cash value for any purpose.
You have the option to skip premium payments if your account has accrued sufficient value because the premiums will be taken from the accrued value. A Universal Life policy also has the potential to earn a higher rate of return than a whole life policy, although there is a risk that your rate of return could drop.
Whole Life Insurance
Whole Life Insurance is life insurance that you own for your entire lifetime. The amount of the death benefit or face amount can be selected to meet your needs.
Premiums, or payments, are fixed and can be paid monthly, quarterly, semi-annually, or annually. As more premiums are paid, your policy accumulates a cash value that grows on a tax deferred basis. In essence, whole life is like buying a house versus renting it. The monthly cost is higher than it would be for a term life policy, but with each payment you make you gain equity. You can borrow against a Whole Life policy for any purpose. Loans, however, require you to pay interest and any borrowed amount you do not pay back is deducted from the payout to your beneficiary at the time of your death.
Final Expense Insurance
Your family means the world to you. The last thing you want is to leave them with major expenses after you’re gone. Final Expense insurance is life insurance that helps provide the money they may need to pay medical bills, funeral expenses, legal fees or unpaid bills. It is an insurance policy that lets you decide how your assets are distributed. By planning ahead, you can help protect your loved ones from unnecessary financial stress when you die. And, you can distribute your assets in the manner you decide!
How Much Life Insurance is Enough?
One reason for choosing a life insurance policy is to figure how much your dependents will need after you’re gone. In order to choose the face value (the amount your policy pays if you die) of your life insurance you should consider the following:
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How much debt you have: All of your debts must be paid off in full, including car loans, mortgages, credit cards, etc. If you have a $200,000 mortgage and a $4,000 car loan, you need at least $204,000 in your policy to cover your debts (and possibly a little more to take care of the interest as well).
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Income Replacement: One of the biggest factors for life insurance is for income replacement, which will be a major determinant of the size of your policy. If you are the only provider for your dependents and you bring in $40,000 a year, you will need a policy payout that is large enough to replace your income plus a little extra to guard against inflation. Just to replace your income, you will need a $500,000 policy. This is not a set rule, but adding your yearly income back into the policy (500,000 + 40,000 = 540,000 in this case) is a fairly good guard against inflation. Remember, you have to add this $540,000 to whatever your total debts add up to.
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Future Obligations: If you want to pay for your child's college tuition you will have to add this to the amount of coverage you want, which would be about another $100,000
Adding everything together, you will probably want a policy for $840,000 ($540,000 to replace yearly income + $200,000 for the mortgage expense + $100,000 university expense).
Once you determine the required face value of your insurance company, you can start shopping around for the right policy (and a good deal).
Obviously there are other people in your life who are important to you and you may wonder if you should insure them. As a rule, you should only insure people whose death would mean a financial loss to you. If you have a spouse or partner that also is a contributor to the family income, then it would make sense to go through the same exercise to determine the face value of the policy.
Term Life Insurance
Buying insurance of any kind is often confusing. In order to compare policies by price, you have to be sure that each policy carries the same benefits for the same amount, and figure in a dozen different factors. It’s enough to set your head spinning in most cases.
Term life insurance coverage can be relatively easy to comparison shop. It simply covers you in the event that you die before the end of the term for which you are covered.
How Term Life Insurance Works
Term life insurance will pay out a specified lump sum to the person that you name as beneficiary in the event that you die before the policy expires. The payout is subject to a few exclusions, most often suicide or other self-inflicted conditions.
Other than deciding if you want guaranteed or renewable premiums, there’s no need to worry about other bells and whistles, so comparing policies is a simple matter of comparing premiums among the various life insurance providers.
How Much Coverage Do You Need?
The biggest decision you’ll face is how much life coverage you need. The general rule of thumb is that, at a bare minimum, you should provide at least enough to pay off your outstanding debts and cover your funeral expenses. The face value of your policy should cover any remainder on your mortgage and other debts, and provide a cushion to help your family get back on their feet financially after your death. If you have young children, you should also cover your expected annual salary multiplied by the number of years until the youngest is no longer financially dependent.
What Factors Are Considered in Assigning a Premium?
There are a number of factors that may affect how much you pay for your policy aside from the amount of the death benefit you choose. These include your age, your gender, the state of your health and any pre-existing conditions, and whether or not you smoke. Smokers can expect to pay higher premiums than those who don’t use tobacco products.
Why Should You Buy Life Insurance?
If you are the major breadwinner or a major contributor to family income, you should be insured. No one likes to imagine what will happen if they die, but it makes sound financial sense. Potentially, your life insurance benefit can mean the difference between your family keeping the home in which you live and losing it to debt if you are no longer able to provide for them. In general, if you are carrying a mortgage, you should carry at least enough insurance to cover the remaining mortgage so that your heirs aren’t left with an ongoing financial impact.
Tips To Help You Save Money on Life Insurance
- Only buy what you need
- Get the most appropriate coverage for a mortgage
What is Universal Life Insurance?
Universal life insurance is a form of permanent life insurance offering the low-cost protection of term life insurance as well as a savings element (like whole life insurance) which is invested to provide a cash value buildup. The death benefit, savings element and premiums can be reviewed and altered you as your circumstances change. In addition, unlike whole life insurance, universal life insurance allows you to use the interest from your accumulated savings to help pay premiums.
Premiums, which are variable, are broken down by the insurance company into insurance and savings, allowing you to make adjustments based on your circumstances. For example, if the savings portion is earning a low return, it can be used instead of external funds to pay the premiums. Unlike whole life insurance, universal life allows the cash value of investments to grow at a variable rate that is adjusted monthly.
