When we value things, we protect them. If you wrote down a list of the most important things in your life– who or what would top the chart. Your family, right? So how can you protect them even when you are gone?
This is by far one of the most important investments you will make to secure your family’s long-term financial plan, yet it makes us uncomfortable to talk about. The purpose is easy to understand, it serves as a replacement of your income when you die. However, it can be difficult to choose the best policy to suit your needs when there are so many options available. Alas, the process does not have to be overwhelming and confusing. Below we are going to break down the various types of life insurance to help you decide which one is right for you.
Term Life Insurance
As the simplest and most affordable type of life insurance you can purchase, term life insurance is the most commonly chosen policy. Why? It serves one purpose: to pay the people you selected a fixed amount of money, typically your spouse, children, or other beneficiaries. Unfortunately, term life insurance is not worth investing in unless you die during the course of the set term defined by the insurance company. While this might not be what you want to hear, it is important that you are proactive when it comes to taking care of those you love the most so they won’t have to worry when you are no longer here. In order to legally operate a vehicle, you must have auto insurance. When you pay your premium, they deposit the money. If you are in an accident, they will pay the claim. But what happens if you aren’t? Are you expecting a refund even though they willingly took on a risk? No. Term life follows the same concept, you pay the insurance company to cover the financial risks should you die within the term of you policy. Generally, these terms are 10, 15, 20, or 30 years. Let’s say you purchase a 20-year term life policy with $500,000 in coverage, for the next 20 years you will pay you monthly or bi-annually payment. Should you die within that time frame, the insurance company will issue your family the death benefit (that $500,000 you invested in). If you are choosing a term-life policy, we suggest one that is at least 10% higher than your annual income. This ensures your income will be replaced if your family loses you and it is the most affordable way to protect your family down the road.
Permanent Life Insurance
Term-life is relatively easy to digest, permanent life insurance can get a little messy. Why? It serves two purposes. The first to provide the benefits of life insurance by paying your beneficiaries after your death. It also serves as an investment account. Permanent life insurance policies include cash value. Essentially, cash value is a savings account in which you deposit money into monthly. You are allowed to borrow against this if needed and the longer you have the policy, the more cash value it will have. As discussed above, term-life expires but permanent life insurance does not. They will last until you die or cease payments of your premiums. Depending on the conditions of the policy and the growth of your cash value play a role in the amount that your dependents will receive. You can include whole life, universal life, and variable life in your permanent life insurance policy.
Whole Life Insurance
By purchasing a whole life policy, you are able to lock in the premium amount for as long as you want the policy. You are responsible for paying the premium each month to the insurance company. Part of your premium will be invested into your cash value and will grow over the duration of the policy. The cash value grows with the policy like a savings account. But it is important to remember that your life insurance serves one main purpose– pay your beneficiaries in the event of your death. However, because whole life does this and grows a cash value, you are typically paying more money for less coverage. Which is why whole life insurance may be quite a bit more expensive than term life insurance. On top of that, the cash value in this type of policy will not grow as fast as the extra money you are forking out would if you chose to invest it in a mutual fund instead. It doesn’t make much sense to spend more on less coverage and less return on investment.
Universal Life Insurance
As with whole life insurance, universal life has a death benefit and cash value. A difference between the two: universal policies offer adjustable premiums, whereas whole life insurance does not. This can allow you to have some access to a portion of the cash value which gives you the chance to adjust your annual payment. However, this does not mean you no longer have a minimum premium payment requirement to keep the policy. But depending on the cash value, you may be able to eliminate a minimum premium payment– or you can opt to leave well enough alone and add to your cash value. With a portion of your monthly premium of your universal life policy going towards the death benefit and other being invested as a savings, it is believed that this investment will continue to grow over time and potentially offset the premiums. However, this is not a good investment strategy. Why? First off, the fees. Keep your eyes peeled for management charges as they can be a small fortune. Another thing to ask about, the annual renewal term. You can expect to have a small part of your premiums renewed each year or applied to the cash value of the investment portion of your policy and more significant portions renewed annually and applied to the insurance part of your policy. Annual renewal terms can sometimes help to cover the increased risk of death as you age but that is the only thing you can count on increasing, not your savings. You would have better results getting a term life policy and investing your money into a mutual fund.
Variable Universal Life Insurance
Like whole life and universal life, variable universal life policies also serve more than one purpose. Variable universal life policies are even more complicated as they try to be a life insurance policy, a savings account, and a mutual fund all at once. And as you can imagine, that is not cheap. With a variable universal life policy, you can decide how your cash value will be invested. Traditional mutual funds come with multiple risk levels of stocks and bonds for you to choose, like a traditional mutual fund would. You will be presented with several investment options for your cash value and you can pick the risk– this is where the term “variable” comes in. But don’t forget, insurance is about risk and who assumes it. This policy puts you in control of where your money gets invested. This means you will be the one assuming the risk, not your insurance company. Variable universal life policies do not come with a guarantee of what the cash value of the policies will be in the end. Variable universal life policies come with high management fees so you would be better off getting a term life policy and keep your mutual fund investments separated.
More Types of Life Insurance Policies
Term life and permanent life insurance policies are the two primary types of life insurances but insurance companies offer many other policies. Each of these were developed to pay out death benefits differently. We’re going to give you a brief synopsis of each so you have a little bit of an understanding as you explore your options.
- Joint Life Insurance, otherwise known as First-to-Die – Brutal, huh? Joint life insurance, often referred to as first-to-die insurance is a cash value policy directed to couples who want to share a policy between themselves. Essentially, this is the joint-checking account of life insurance. It covers both you and your partner for one fee. Whenever the first spouse dies, the policy will pay death benefits to the other. But the problem with this type of policy is that it takes a one-size-fits-all approach. How? It does not acknowledge that one spouse makes more than the other. We know that the purpose of life insurance is to help replace a person’s income after their death. Majority of couples do not make the same amount of money– on many occasions one makes significantly more than the other. Joint-life insurance pays the same benefit to either spouse regardless of the circumstances. So you may end up paying more than necessary to insure one portion of your income to make sure the other portion has adequate coverage. Take the time to determine if this is the right way to go about obtaining a life insurance policy for both you and your spouse– explore your options to avoid paying too much. For many, joint life policies do not make sense considering the expense.
- Survivorship, or Second-to-Die Life Insurance – If a joint life policy did not make sense for you, neither will a survivorship policy. Also a cash value policy, survivorship insurance does not pay out any benefits until both you and your spouse die and at that point it will pay your beneficiaries– and for that reason we suggest looking at any other option. Survivorship policies are marketed towards wealthy individuals who want to avoid a hefty estate tax on what the assets they will leave behind. They were not designed to cover your spouse and your spouse won’t be covered after your death. If you haven’t already figured it out, like all cash value policies, you and your spouse would be better off getting a term life policy and investing in a separate mutual fund.
- Final Expense, or Burial Insurance – While this can seem to make sense as it is affordable and schemey advertisements will assure you that you will have peace of mind by sparing your family the expense of paying for your funeral– be cautious. Burial insurance is also a form of cash value insurance that does not make any sense financially. If you start saving for your funeral monthly in your mid-fifties, by the time you are 70-80, you could have set aside thousands. And investing this money can make your dollar go even farther. On average, it cost approximately $7,000 to pay for a funeral– so saving merely $50 a month will leave your family with enough money to cover your funeral and some. Talk about peace of mind.
- No Medical Exam Insurance – Part of the application process for both term and whole life policies is a medical screening. This includes having your blood drawn, weighing your body, and drug screening. COVID protocols have sort of changed the way to go about this making no medical exam policies and touchless examinations the new norm. Many well known, top-tier companies have begun offering this method at the same rates as the choices that do mandate a medical examination.
- Decreasing Term Life (Mortgage & Credit Life Insurance) – Decreasing term life was created to offer a death benefit that decreases at the same rate as your liabilities. Two examples: mortgage life and credit life insurance. For these, your death benefit will follow an amortization schedule similar to that of your mortgage and other personal loans. Companies will win you over with the idea of settling your debts and paying off your mortgage when you die. Essentially, this is another way of making payments on your debts while reducing the benefits of your life insurance for your beneficiaries. So basically, your loved ones will inherit paid off or reduced debt without any extra remaining for their wallets. As with term-life, these policies do not have cash value so at the end of term it won’t hold any value. Life insurance was designed to protect your family and their finances long-term. But how do you plan for something you are not familiar with? And this is the problem with decreasing term life policies. You cannot make any assumptions about its worth when you die so it may not provide your family with much financial security.
- Accidental or Dismemberment Insurance – Accidental or dismemberment policies, known as AD&D is one most of us have heard of or encountered. Insurance agents attempt to sell you a cheap policy that will pay out should you die accidentally or experience dismemberment. Injured at work? Receive a portion of coverage. Accidental death? Full death benefit will be paid to beneficiaries. While these policies are affordable, typically only costing a few extra dollars per paycheck, it is important to remember that you get what you pay for. AD&D policies come with specific limitations and will not pay your death benefit in that event that you die as the result of a medical procedure, issues related to your health, or a drug overdose. With age, you are less likely to die as the result of an accident. And for this reason, we once again suggest that you opt for a term life policy– they are worth the investment.
How Much Insurance Do You Need?
Unsure about how much life insurance you should carry? Your term life insurance policy needs to cover ten to twelve times your annual income. If you make $50,000 before tax, you should at least carry $500,000 in coverage. Why? If your spouse chooses to invest that money in a good mutual fund averaging at least 10% return, they are eligible to receive $50,000 annually from that investment to replace your income without dipping into your original investment.
Life Insurance Does Not Have to Be Complicated: Choose Term Life
When choosing a life insurance policy that makes the most sense, term life is the only way to go. There are not any gimmicks, it is affordable, and it serves one long-term purpose: provide your loved ones with financial support in the event of your death. That’s why you purchased the policy, right? Oh and did we mention that the death benefits of term life policies are rarely taxed? Talking about death is never an easy conversation, but it is important that you prepare your family for life after you. Grieving is hard and can last a long time. You don’t want to leave them on a financial bind– which is why your life insurance is incredibly important. Our team of agents at Rollins Insurance are here to answer any questions you might have about life insurance. We can help ensure that you have the right kind of policy while helping you secure a term life policy to suit the needs of your family.
Rollins Insurance represents multiple A-rated insurance companies to make sure we deliver the most competitive rate packages to our clients in Kentucky and Ohio.
Rollins Insurance is an independent insurance agency providing our clients the best prices with the most coverage possible since 2008. We represent multiple A-rated insurance companies to make sure we deliver the most competitive rate packages to our clients in Kentucky and Ohio. We find that most people are under-insured and over-paying when we meet them. We love what we do and our primary business is Personal Auto, Homeowners, and Life and Health insurance. We are a family-owned and managed business that specializes in providing needs-based insurance services.
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