As we move into the longer and warmer days of Spring, we feel the urge to clean up, de-clutter, and air out our surroundings. It’s time for renewal and a healthy, fresh start.
There is another important area of our lives to revisit this time of year: life insurance. If you’re on the fence deciding whether or not a policy is right for you, or if you’re confused by the available options, read on for an easy-to-understand guide that will help you decide which type of life insurance is perfect for you.
Life Insurance: Make it Personal
No matter your age, budget, or lifestyle, there is a type of life insurance that will fit your needs. And don’t worry–it doesn’t have to be a “one and done” situation – you can choose a type of coverage to start, then adjust, add-on, or change your policy as time goes on.
The two basic categories of life insurance include Permanent Life and Term Life. Both types of life insurance allow you to choose one or more beneficiaries, which are the individuals who will receive the funds. Beyond that, they are very different. Let’s take a look:
Permanent Life Insurance
Permanent life insurance provides lifelong coverage; it never expires. It includes a death benefit (lump sum of money paid upon your death) and has a cash value from which the owner can borrow or withdraw to meet a substantial or unexpected need. Permanent life insurance comes with attractive tax benefits: as long as the policy remains active, you’ll pay no taxes on earnings. The premiums on this type of insurance, though, are much higher than those of term life insurance.
Term Life Insurance
Term life insurance, also known as “Pure” insurance, provides coverage for a set amount of time. Available in 5, 10, 15, 20, 25 or 30-year increments, a policyholder’s beneficiary will receive a guaranteed death benefit if the policyholder dies within the specified term period. The premiums with this type of insurance are more affordable than permanent life insurance because you may outlive the term, resulting in no funds collected. Should this happen, however, you can renew it for another term, convert it to permanent coverage, or simply allow it to terminate.
Types of Permanent Life Insurance
There are two types of permanent life insurance: Whole Life and Universal Life.
According to the Insurance Information Institute, whole life insurance is the most commonly chosen type of permanent life insurance.
The premiums and death benefits are fixed for the life of the policy and will never fluctuate due to market conditions, so you will know how much you are paying per month, and your beneficiaries will know how much they will receive. A portion of each month’s premium is put into a savings reserve which earns interest and gives it cash value. After a certain amount of time has passed, you may be able to take out a tax-free loan or withdraw funds against your whole life insurance policy.
Universal life insurance has many similarities to whole life insurance: as long as premiums are paid, the policyholder is covered for their entire lifetime, and the policies also hold a cash value. The biggest difference lies in the premiums and death benefits. With universal life insurance you can adjust your monthly premium, or even temporarily stop payment if the cash value of your account is high enough. You can also increase the death benefit amount (which would increase your monthly premium) or decrease it–lowering your monthly payments–according to your needs. The cash value of universal life insurance is affected by the market, earning interest based upon current money market rates.
Types of Term Life Insurance
There are three types of term life insurance: Level Term, Yearly Renewable, and Decreasing Term.
Level Term Policies
Also called “level benefit” policies, level term policies feature a fixed premium and death benefit for the duration of the policy. Budgeting for the policy is easy – you know how much each month will cost. If the policy is still active upon your death, your beneficiary will know exactly how much they will receive and can plan accordingly.
The best time to take advantage of a level term policy is when you are in good health, so you can lock in a desirable rate. If you’re going through a difficult health situation, start with a yearly renewable term policy (below), and re-apply later for a level term when you’re back on your feet.
Yearly Renewable Term (YRT) Policies
With yearly renewable term (YRT) life insurance (also called “annual”), you’re not committed for the long-term. The policy is good for one year from date of purchase and can be renewed each year without requiring a health exam (up to a certain age).
Although the death benefit will stay the same throughout the duration of the policy, premiums will go up as you age because your risk of health complications may increase. For young policyholders, however, the low initial premium cost of a YRT may be worth it, and many insurance companies will allow it to be converted to whole life without a medical exam.
Decreasing Term Policies
If you have loans for tuition, a home mortgage, or other debt that you will be paying off in time, you may opt for a Decreasing Term policy. With this type of life insurance, the premium will remain the same, but the death benefit will decrease (on a set schedule) as time passes. The diminishing death benefit coincides with the paying down of your debt, and your loved ones will be less in need of a “safety net” as that debt becomes smaller. You can determine the duration of the policy – from 5 to 30 years, to make planning simple. Because of the decrease in death benefit, these policies typically offer cheaper premiums than level term coverage.
A Hybrid Choice – Return of Premium (ROP) Policies
Another type of term insurance exists that bridges the difference between whole and term life. Return of premium (ROP) term offers a fixed death benefit for a specified amount of years, just like level term insurance. If you outlive the term, however, it offers a choice. You can choose to receive a 100% “refund” of the premiums that were paid (without interest), or, you can choose to convert the policy into “paid up” life insurance. This means that there will be a fixed death benefit that is typically lower than the original death benefit of the policy but may still represent a substantial life insurance amount. Unlike whole life, though, an ROP policy does not accumulate additional cash value.
Life Insurance – A Wise Choice
Although more crucial in some stages of life than others, life insurance can be beneficial for just about anyone. Once you clarify the categories of life insurance and types within each category, the way will become clear as to what type of policy will work best for you.
Look at life insurance as a financial tool to give you security, safeguard your loved ones, and even provide extra cash if needed. And, when it’s time for spring cleaning each year, dust off and review your policy to make sure it still fits where you are in life.
At 3to99, we specialize in tailoring life insurance choices to best fit an individual’s needs. We’re here to answer questions, explain the process, and help you manage the policy going forward. Our motto is “People Matter”, and the well-being of yourself and your loved ones matters to us. Contact us today for a free consultation, and gain peace of mind as you welcome Spring!