While having a life insurance policy can provide families with valuable peace of mind, knowing which type of coverage to invest in is not always a straightforward answer. The type of life insurance that makes the most sense for you and your family depends on a variety of factors including how much you want to pay and what you expect it to cover. Below we outline the options most commonly available to you.
Two Main Life Insurance Categories
All life insurance policies fall under the category of either “Term Life Insurance” or “Permanent Life Insurance”. Each cover pretty much what the name describes. Term life insurance covers a specified term of your life and guarantees a payment if you die within that time frame. Often the terms last 10, 15, or 20 years. Once the term expires, you can either renew it or terminate the policy. Permanent life insurance covers you for your entire life from the time you begin the policy and does not expire. As you would expect, a permanent life insurance policy is more expensive than a term policy. Another major selling point of a permanent life insurance policy is that you can benefit from it during your lifetime. For example, you can borrow against the cash value or potentially surrender the policy for a cash payment to help fund your retirement.
Sub-Types of Life Insurance Coverage
Under the two overarching categories of term life and permanent life insurance, there are sub-types of policies. Here is an overview of the most common types of term and permanent life insurance:
• Whole Life. Whole life insurance is probably one of the most straightforward options as it covers just that – your whole life. Once you enroll in the policy you pay a set premium, usually on a monthly, quarterly, or annual basis. As long as you keep up with your premiums, you will be covered by the policy for your entire life. Because of this full coverage, whole life insurance is generally the most expensive life insurance option. One advantage to consider with whole life insurance is that while part of your fixed premium goes towards the insurance coverage (commonly referred to as the “death benefit”), the rest goes towards an interest-bearing account (known as the policy’s “cash value”). You can even take out a loan against the cash value of your whole life insurance policy, if necessary. And in some cases you can also terminate the policy and withdraw those funds, although surrender fees may apply.
• Universal Life. Universal life insurance is a type of permanent life insurance that allows you to increase or decrease your death benefit at any time, which in turn adjusts your premium payments. For this reason, universal life insurance is sometimes referred to as “adjustable life insurance”. Like whole life insurance, this type of coverage allows you to borrow funds from the policy’s cash value. You can also withdraw funds while the policy is still active, although certain limitations may apply.
• Variable Life. Similar to whole life and universal life insurance, variable life insurance also allows you to accumulate cash savings on top of your death benefit. The difference is that with variable life insurance, those cash value funds are invested in stocks, bonds or mutual funds to help grow your money faster. This creates the potential for high gains - as well as high losses depending on the market and your investment choices. Because of the risk involved, it is highly recommended that you work with a financial advisor if taking out a variable life insurance policy.
• Guaranteed Life. Guaranteed life insurance is one of the easiest types of whole life insurance to be approved for as you cannot be turned down due to your current health or medical history. There is no medical exam required for a guaranteed life insurance policy, nor is your medical history used to determine your premium. However, this often results in guaranteed life insurance policies having higher premiums and lower death benefit payouts compared to other policies. This type of coverage is often thought of as a “last resort” policy, and is typically only a good idea if you have a health condition that may disqualify you for other types of life insurance policies. It’s also important to note that some guaranteed life insurance policies have “graded death benefits”, which can prevent your beneficiaries from receiving a full death benefit payout if you pass away from natural causes within a certain timeframe after the policy is taken out.
• Group Life. Group life insurance is a type of coverage offered by some employers as part of the company’s benefit package. Group life insurance is almost always term coverage rather than whole life. As the cost of a group policy is covered by the employer, there is usually no cost to employees. The amount of coverage provided by a group life insurance policy will vary by employer, but most policies will allow the employee to purchase additional coverage on their own if needed. Group life insurance typically does not require a medical exam. Although the coverage provided may be lower than that of other life insurance policies, there is generally no reason to deny coverage by your employer if it is free. It’s a good way to know you have some coverage, especially if you are young and not yet ready to invest in a more in-depth life insurance policy. Keep in mind though, that if you change employers you will typically no longer be covered by your employer’s group life insurance policy.
In addition to these common types of life insurance, there are other kinds of policies that can cover any outstanding loans you may have upon your death. One such type of coverage is mortgage life insurance, which pays off any outstanding balance you may have on your mortgage so your heirs don’t have to foot the bill. Likewise, credit life insurance can cover the balances you owe on other types of loans, to prevent your loved ones from having to settle your debts when you pass away.
With so many options to choose from, it can be intimidating trying to determine which type of life insurance is suitable for you. Remember to reflect on your own personal situation and financial goals, and consider consulting with an insurance professional to help understand the details of each option, and whether they present any potential tax implications.
If you’re interested in starting a conversation about life insurance, don’t hesitate to contact us today. BankFive offers both whole life and term life insurance coverage, and we’re happy to help you better understand which option might be right for you and your loved ones.