Which Life Insurance Option is Right for You?Submitted by Eric Nichols, ChFC, AIF® | United Planners Financial Service on March 26th, 2015
Who doesn’t like options? We love them when buying a car, and we expect them when ordering lunch off a fast-food menu. When buying life insurance, however, too many options can not only increase confusion, it can often lead to making the wrong choice, or worse, no choice at all. With life insurance, it’s not quite as simple as choosing between a sedan and a coupe; life insurance options are far more complicated and far-reaching and there is definitely no one-size-fits all solution.
As with any major purchase, life insurance options must be studied and understood in order to match the right one to your needs, priorities and preferences. It starts with an understanding of the different types of life insurance available so you can then begin to narrow down the choices. The following is a breakdown of the major types of life insurance available; however, it’s important to note that there can many variations and blends for each.
Term Life Insurance
Term life insurance is temporary insurance, and is suited for people who need to cover a need for a specific period of time. The most basic form of term insurance is Yearly Renewable Term (YRT) which provides a level death benefit with premiums that increase each year. YRT premiums start out very low; however, eventually, they can become very expensive depending on how long you keep the coverage. Level Term insurance levels the premium over a specified period of time – 10, 15, 20 or 30 years – after which the premiums will increase significantly.
Whole Life (Permanent) Insurance
Whole life insurance is a form of permanent insurance that provides a level death benefit and a level premium with no expiration as long as the premiums are paid. It’s best suited for those who project that there need for life insurance may last more than 20 or 30 years. At that point, whole life insurance may be a more cost effective way to own life insurance. Although the fixed premium payments are higher than term insurance, a portion of the payments are allocated to a tax-favored cash value account. As the cash values increase, the actual cost of insurance decreases which allows the cash values to grow faster in the later years. Cash values can be accessed for any purpose and are often used to pay a portion of the premium in later years.
Universal Life Insurance
Another form of permanent insurance, Universal life(UL) is sometimes thought of as a hybrid of term insurance and whole life, but with more flexibility. With UL, the insurance component and the cash value component are separate; and, because neither the insurance cost or the cash value growth is guaranteed, as it is in whole life insurance, the premium costs are lower ranging somewhere between the cost of term and whole life insurance. Instead of a fixed, guaranteed rate of cash value growth, UL offers a current yield tied to market interest rates, so as market interest rates increase, so too will the UL cash value yield. UL is most suited for people who are willing to sacrifice some of the guarantees of whole life in return for the potential for higher returns and more control over their life insurance plan.
Variable Life Insurance
The main difference between Variable Life (VL) policies and Whole Life or Universal Life policies is the way the cash value portion is invested. Instead of a fixed yield component, VL policies have separate investment accounts, much like a family of mutual funds, which enable the policyholder to allocate the cash value portion of their premium payment among several different types of accounts, such as growth stocks, aggressive stocks, corporate bonds, cash, etc. Although investing in separate accounts entails more risk for the opportunity to earn higher returns, VL offers downside protection through a guaranteed death benefit, so, even if the separate accounts lose value, the beneficiary will still receive the full death benefit.
The right life insurance option for you ultimately comes down to the type of coverage that best fits your needs, priorities and your outlook on your financial circumstances well into the future. All of these factors should be considered with the guidance of a life insurance professional who can give you an independent assessment and provide you with a variety of life insurance options.