Understanding Life Insurance Policies

       Life insurance can be a bit tricky to understand.  I remember thinking, “I want life insurance to cover my family.  Let me call up my buddy who works in the industry and get a policy.”  Little did I know, there were so many different options available! It can be pretty daunting to not only commit to life insurance, but also to navigate how you want it structured.

       I found out there were basically two families of insurance policies with siblings under each one: term and permanent. Term life is a policy that spans a set time period, while permanent life covers the entirety of your life.  Let’s briefly explore the basics of both, and then provide the most popular siblings for permanent life.

Term Life

       Term life provides benefits for a set amount of time, typically between 5-30 years.  You pay monthly premiums until the coverage ends. If you happen to die before the end period, your designated beneficiary will reap the benefit.  

Advantages of Term Life

       Term life, since it only covers a specific period if time, is a cheaper option.  You won’t pay as much since the risk towards the insurance company is lower. This is ideal for someone who isn’t yet thriving financially, but plans on increasing their savings to provide for their loves ones later down the road.

Disadvantages of Term Life

       Since coverage is only for a set time, you might not reap any benefit.  While the policy will give you peace in the event that something were to happen, you have to die before that period ends to see the payout.  Odds are, that won’t happen and you will still be alive after the term life ends. (Not that you would complain about that!)

Permanent Life

       Permanent life provides benefit for life.  No matter when you die, the benefit will be paid to your beneficiary.  Besides this crucial difference with term life, permanent life also has another component: cash value.  This is where it starts getting tricky. Cash value is a part of your premium that works like an investment.  It accrues interest and grows as your policy advances. This money is helpful as you can make a withdraw from it, borrow against it, and use it to pay premiums.  You will also receive your cash value if you decide to cancel the policy.

Advantages of Permanent Life

       It covers your entire life, meaning your beneficiary is guaranteed to receive a benefit (assuming you keep paying the premiums!).  The investment component is a plus because your money will grow tax-deferred. It also allows you to borrow against the current cash value and take out a loan.  You can make a withdraw from the cash value and even use it to pay premiums. And that cash value won’t be lost. Even if you cancel the policy, that money will be given to you.

Disadvantages of Permanent Life

       Since it spans your whole life and provides an investment component, permanent life is much more expensive than term.  It could cost 3-5 times more. Depending on your plan, the interest accrued might not be great and it could take 12+ years for the cash value to reach a decent amount.

Whole Life

       This is the traditional permanent life insurance policy.  It provides a level premium, meaning that the policyholder will pay the same premium amount from the start until the day of death.  So if you begin paying $100 a month, you will end paying $100 a month. This is great for offsetting the higher premium cost later in life.  If you were to pay by age, it might cost $20 a month to start and wind up being $400 a month towards the end. To avoid this burden as an elderly person, permanent life provides a great benefit through level premiums.

Universal Life

       Universal life is more flexible than whole life as it pertains to the benefit and premium.  You can change the benefit amount and your monthly premiums as the policy advances. If times are tough, you can lower your monthly premiums.  If a major life change occurs (marriage, children, mortgage), you can increase the benefit amount.

Variable Life

       Variable life gives you more flexibility when it comes to investing the cash value.  You can allocate cash value to be invested into stocks, bonds, and/or mutual funds. This is more risky, but provides a greater possible reward as well.  

Variable Universal Life

       Variable universal life combines the flexibility of variable with the flexibility of universal.  You can change the benefit amount and monthly premiums, and you can also invest with more risk.