Those who buy a life insurance policy generally do so as a means of financial protection for their families. The beneficiary of the deceased will receive a lump sum benefit if the death occurs while the policy is active. Funds are commonly used for funeral and burial costs, debts such as a home mortgage, and future educational expenses of children. Life insurance coverage is broadly categorized as either term life or whole life (permanent life) insurance. Whole life policies make up approximately 60% of those sold within the market.
|Overview of Types of Life Insurance Policies |
|Term Life||Whole Life (Permanent)|
Term Life Insurance
These policies offer financial security for the beneficiary of the policyholder for a defined “term” or time period. In comparison to a whole life policy, they are considered a temporary option. It is the most simplistic and least costly option that may extend up to a 30-year-period. Those with minor children may maintain these policies until their kids have grown and no longer depend on them. Term insurance products are typically purchased exclusively for death benefit coverage. Unlike other forms of life insurance, they generally do not have a cash value component that may accumulate funds.
Renewable vs Non-Renewable
Most term policies extend over a multi-year period. A term of 20 years is quite common, after the time period has passed, the policy may be renewable. Establishing a long-term policy generally provides you with a stable premium cost that will not increase over time. Another advantage is if the insured party begins experiencing health concerns they already have existing coverage in place. Older adults and those will health issues are viewed as a greater risk and will have difficulty obtaining a new policy. Non-renewable policies end after the term and buyers will then have to shop for a new policy. When a term policy is renewed, the new premium is likely to be higher. This increase is likely because the insured party is now older. Renewals also may account for inflation and the rising cost of living.
Level vs Decreasing Term
Another distinction between types of policies involves whether they are level or decreasing. Most term policies have a level premium, but policies may or may not have a level death benefit. A level death benefit amount is clearly established when the policy is purchased and will remain unchanged throughout. Over 90% of term life policies issued are level. A policy with a decreasing level has a death benefit amount that is reduced at some interval over the policy term.
We will consider a scenario of a decreasing term policy that has an initial $250,000 death benefit with a 20-year term. This example has a 2% annual (yearly) decrease. We will track it at five-year intervals thus realizing a 10% decrease every five years.
|Years||Level Death Benefit||Decreasing Death Benefit|
Why Would Someone Select a Decreasing Term Policy?
Policyholders may consider a decreasing term policy if their primary concern is paying off a long-term loan upon death. One example is a home mortgage that is being paid off and the balance is steadily falling. The insured may have teenage children entering college soon and progressing into the workforce; therefore, their financial dependency is also diminishing. A decreasing policy is likely a more affordable option in most cases.
Whole (Permanent) Life Insurance
A whole or permanent life insurance policy also provides a death benefit as long as the premium is paid. It will also allow you to accumulate cash value depending on the type of permanent policy. A certain portion of the premium payments is invested. These funds may be invested in the stock market and potentially diversified similar to a mutual fund. If the investments perform well, the life insurance company may then pay you dividends based on earnings. These cash value arrangements often have great tax advantages. Many types of permanent life policies allow you access to the funds for purposes such as:
- To make your premium payments
- To extend yourself a loan at a lower interest rate than you could obtain in the market
- As funding for other investment opportunities
- For use as supplemental income in retirement
Whole Life vs Universal Life
Whole and universal life fall under the category of cash value policies. The distinction is primarily related to how premiums are paid and how cash accumulates. Whole life policies make the schedule of premium payments more simplified by using a set schedule. Whole life policies also generate a fixed return that “guarantees” you some cash value.
With universal life, the policyholder has some degree of flexibility in making their premium payments. The cash value component of the policy is more volatile and is dictated by short-term interest rates. Although a universal life policy may also have some “guaranteed” cash value, it is subject to changes in the investment markets. A possible disadvantage is that death benefits could decrease and policy premiums may increase in response to market conditions.
Variable vs Non-Variable
Variable life policies are highly volatile because premium funds are heavily invested in stocks, bonds, and other market funds. If these investments perform poorly the death benefit and cash value will decline. When investment performance is good there is a significant upside with strong increases in cash value. Policies deemed as non-variable are more conservative and not subject to the sizable extremes found in variable policies. They typically guarantee a minimum interest or cash value; however, lack the potential for large cash value gains from investment performance.
Variable universal life insurance coverage is a hybrid product. These policies use a variable cash value approach that has the investment-based risks and rewards. They also offer policyholders flexibility in their premium payments and death benefits that are typically associated with universal models.
Larger employers often provide basic group life insurance policies to all employees. Many are paid entirely by the employer or have a small amount of employee contribution. These are generally small policies that rarely have a death benefit greater than $100,000. Usually medical exams and health inquiries are not required. Most of these policies are not sufficient for individuals with dependents. Many do offer the employee the option to add supplemental life coverage that is sometimes available at a good value. We will take a look at a couple standard plans offered by large Arizona employers.
- The City of Mesa: Their standard program provides full-time employees with life coverage equal to their annual salary at zero cost.
- The University of Arizona: Offers an Employer-Paid Life Insurance benefit with automatic enrollment for those eligible for benefits. It contains a $15,000 term policy that includes an additional $15,000 “seat belt incentive”. Also included is a $15,000 policy for Accidental Death and Dismemberment.
- Hexcel Corporation: They have an office in Casa Grande that employs roughly 500 people. They provide a group life policy to employees at zero cost that has a $50,000 maximum benefit.
Buyer Considerations & Premium Allocation
Those considering life insurance obviously have many options to consider. You should consult with an experienced insurance agent who will help you find an appropriate plan that reflects your specific goals. Those looking to accumulate cash within the policy may choose a minimum level death benefit plan.
Enrollment Details & Tips
Depending on the policy that you are applying for, you may be subjected to a medical examination. This is more likely if your policy will provide significant benefits. All types of life policies will have a named person that is the beneficiary. You will need this individual’s social security number or other tax identification information. If the beneficiary is a minor child, you may establish a trust account for benefit distribution. Your policy premium should be an amount that is fairly affordable. This is particularly important if you choose a policy that may have rising premiums.
Independent Life Insurance Agency in Casa Grande
Would your family be faced with severe financial difficulties in the event of your death? Life insurance is a critical means of protection. At Gebhardt Insurance Group, we can help you secure a policy based on your current and long-term needs and goals. We represent many of the best life insurance carriers in the market and understand potential concerns about affordability. If you have an existing life insurance policy that has not been reviewed recently, we encourage you to contact us as well. It is very important to do so if you have had life changes involving dependents, marital status, income, or employee benefits. We can be reached at our office by calling (520) 836-3244.