Life Insurance: Putting a Price on Peace of Mind

Life insurance provides financial protection for your loved ones when you die.  Essentially, in exchange for your premium payments, the insurance company will pay a lump sum known as a death benefit to your beneficiaries after your death. While this money can never replace you, it can help your loved one(s) live the kind of life you hoped to provide.

Life insurance coverage offers affordable financial protection and invaluable peace of mind.  You can choose a legal entity, organization or anyone to be your life insurance beneficiary.  You can name multiple beneficiaries and decide what percentage they each will receive when you die.  Common choices include:

• Your spouse
• Family members
• Friends
• A trust
• Charitable organizations

You can customize your policy to fit your family’s needs by choosing the type of policy you buy, the number of years you want it to last and your coverage amount.  If you die while your life insurance policy is active, your beneficiaries can file a claim and the death benefit will be paid out to them.

There are two primary types of life insurance: term and permanent life. Permanent life insurance such as whole life insurance or universal life insurance can provide lifetime coverage, while term life insurance provides basic protection for a set period of time.

Term life Insurance:

• Term life insurance guarantees payment of a stated death benefit to the insured’s beneficiaries if the insured person dies during a specified term.
• These policies have no value other than the guaranteed death benefit and feature no savings component as found in a whole life insurance product.
• Term life premiums are based on a person’s age, health, and life expectancy.
• Simplest and most affordable type of life insurance.

Whole Life Insurance:

• Whole life insurance lasts for a policyholder’s lifetime, as opposed to term life insurance, which is for a specific number of years.
• Whole life insurance is paid out to a beneficiary or beneficiaries upon the policyholder’s death, provided that the premium payments were maintained.
• Whole life insurance pays a death benefit, but also has a savings component in which cash can build up.
• The savings component can be invested; additionally, the policyholder can access the cash while alive, by either withdrawing or borrowing against it, when needed.

Universal Life Insurance:

• Universal life (UL) insurance is a form of permanent life insurance with an investment savings element plus low premiums.
• The price tag on universal life (UL) insurance is the minimum amount of a premium payment required to keep the policy.
• Beneficiaries only receive the death benefit.
• Unlike term life insurance, a UL insurance policy can accumulate cash value.

How Do I Choose What is Right for Me?

It can be confusing to choose the right type of life insurance.  When you compare some of the biggest differences in life insurance, it is easier to choose.

The biggest difference in term life vs. whole life or universal life insurance is coverage length.  Term life insurance is good for people who want a financial safety net for a specific number of working years, such as the years of paying off a mortgage.  Different term lengths are available such as 10, 15, 20 or 30 years.  Term life insurance is much cheaper than whole life but if you outlive your term, there won’t be a life insurance payout. Term life is a simple, inexpensive way for you to proactively take care of your loved ones so they don’t have to worry when you’re gone.

Whole and universal life insurance give you coverage for the duration of your life. It also includes a cash value component. The biggest difference between whole life insurance and universal life insurance is the cost. Whole life insurance is generally the most expensive way to buy permanent life insurance because of the guarantees within the policy: premiums are guaranteed not to change, the death benefit is guaranteed and cash value has a minimum guaranteed rate of return. Whole life insurance is good for people who like predictability and want lifelong coverage to build cash value.  Your beneficiary will get a guaranteed life insurance payout as long as you’ve paid the premiums to keep the policy current. This type of policy tends to cost more in the early years to support the guarantees it provides.  But, as the cost of living goes up in the years ahead, your whole life insurance premium will remain identical every month and will never cost more.

Universal life insurance often offers more flexibility than a whole life insurance policy.  These policies offer lifelong coverage, provide flexibility when it comes to paying premiums and choices for how the policy’s cash value is invested. A standard universal life insurance policy’s cash value grows according to the performance of the insurer’s portfolio and can be used to pay premiums.  With a universal life insurance policy, the cash value will build depending on the policy type.  If you want to build tax-deferred savings and don’t expect to tap into the funds for a long time, universal life may be a suitable option for you.

No one wants to talk about it, but we have to. You need life insurance. When you’re gone, those you love will be grieving. This is unavoidable. Leaving them to struggle financially, however, is avoidable.  Talking to a professional when you choose your life insurance plan can help you to find ways to afford the right kind of coverage.

Check out these great resources to better educate yourself on choosing life insurance:

Term vs. Whole Life Insurance: How to Choose

Life Insurance Basics

8 Smart Steps for Buying Life Insurance