What are my options for life insurance?

As you begin your retirement planning, you may consider purchasing a life insurance policy that would provide your loved ones with some financial security in the event that you were no longer around to help with important costs. Life insurance policies can help your family and dependents cover mortgage payments, college tuition, funeral costs, and other major expenses that would be difficult to manage with the loss of your income or financial support.

While most people have a basic awareness of what life insurance is, many are unaware that there are various types of life insurance available. The right plan for you will depend on your family’s situation, so before you contact a carrier to purchase a policy, make sure you understand the pros and cons of all of your options.

Term vs. Permanent Insurance

The various types of life insurance can be broken down into two main categories: term life insurance and permanent life insurance.

Term Life Insurance

Term life insurance policies are considered “pure” insurance policies. With a term policy, your premiums go solely toward the death benefit, which would be paid out to your beneficiaries as a lump sum, an annuity, or in monthly payments in the event of your death.

Because term policies have no cash value, and because you only pay premiums for the duration of your policy’s set term of 10, 20, or 30 years, they tend to be more affordable than permanent insurance policies. Younger, healthier people in their twenties and thirties can find term policies at costs ranging from $16-51 a month for a 30-year, $500,000 policy.

Term policies are a good option for people who plan to have paid off most of their other financial obligations by the time their policy ends (and thus will no longer need the extra protections life insurance policies offer.)

Increasing and decreasing term life policies are also available to people who have special considerations. The payouts in these policies change over time. For example, if you’d like to factor in an increase in cost of living to your death benefit, an increasing term life policy would allow you to do so. Alternatively, a decreasing term life policy makes sense if you are purchasing the coverage specifically to settle specific debts, such as a mortgage, that you will be paying off over time.

Permanent Life Insurance

With a permanent life insurance policy, your premiums will go toward the death benefit, but they will also go toward funding additional benefits as well. Because permanent policies last for as long as you pay the premiums, and because they come with extra fees, features, and value, permanent policies can be significantly more expensive than term life policies. In turn, these policies can also become a bit more challenging to navigate and manage.

Whole Life Insurance

Whole life policies are the most straightforward (and the most popular) of the permanent options in that the premium remains consistent throughout your life, the death benefit is guaranteed, and the cash value of the account will increase at a guaranteed rate over time. Under a whole life insurance policy (as with any permanent life insurance policy), your premiums provide you with lifelong coverage and an investment component, known as the “cash value.” In a whole life insurance policy, that cash value will increase, tax deferred, over time. While you do have the opportunity to borrow money against the account, if those loans are not repaid with interest, your death benefit will be reduced, and you run the risk of losing your coverage if you are forced to surrender the policy.    

As mentioned before, whole life policies are the most common of the permanent policy types. However, there are other permanent policy types available:

Universal Life Insurance

Like a whole life policy, your premiums in a universal life insurance policy go toward the death benefit and the cash value. The main difference between a whole life and a universal life policy is that universal life policyholders have the option to change their premiums and death benefit amounts without having to get a new policy.

While these policies are still maintained via a premium, once you have enough money in the cash value, you can use your accrued interest to pay your premiums. Another thing to be aware of if you are considering a universal life insurance policy is that your cash value will have an interest rate that is sensitive to the current market. While this type of life insurance does offer more flexibility to policyholders, it can be more complex and have greater volatility than whole life insurance.

Variable Life Insurance

With a variable life insurance policy, the cash value is placed in the stock market via a series of sub-accounts that operate much like mutual funds. In this way, variable life insurance policies have the potential for greater upside value but also greater risk to the cash value  than investing in lower risk and lower return whole life policies (whose cash values are savings accounts with a guaranteed minimum rate that is unlikely to grow significantly.) That being said, your investment options are limited to the sub-accounts available under your policy; you do not have free access to invest in any mutual fund available on the open market.

Variable Universal Life Insurance

As the name would imply, a variable universal life insurance policy is essentially a hybrid of the universal and variable policy types, borrowing key features from each. With a variable universal life policy, you can adjust the premium and death benefit amount AND invest the cash value in your policy’s sub-accounts. For most people, the investment benefits and flexibility of these more complex policy types are not really worth the potential hassle or confusion they could cause. A term life insurance policy paired with a smart investment strategy is likely to be more beneficial for the typical family.

Simplified Issue Life Insurance (No Medical Exam Policy)

Most traditional life insurance policy providers will require you to take a standard paramedical exam before approving your coverage and setting your premiums. However, there are a couple options available if you do not have time to take an exam prior to purchasing coverage, or if you simply want to avoid taking the paramedical exam. Instead, when applying for coverage through a simplified issue policy, you will fill out a questionnaire related to your health history, and the carrier will run a check on your health records via a medical database, like the Medical Information Bureau.

While prior health issues or pre-existing conditions may disqualify you from receiving coverage from some carriers, it is more likely that you will simply be charged a higher premium.

Guaranteed Issue Life Insurance

Like a simplified issue life insurance policy, a guaranteed issue life policy will allow you to forego the paramedical exam. In fact, this policy type will also allow you to forego the health questionnaire, and you won’t need to pass a check on your medical records either. As long as you are able to pay the (likely expensive) premiums associated with your guaranteed issue policy, the carrier will insure you.

This policy type is sometimes referred to as a “last resort” or “burial insurance” option for elderly people with declining health who would be unable to secure coverage otherwise.

Final Expense Insurance

Final expense insurance covers the costs associated with the policyholder’s death, including medical costs, funeral services, or cremation. Like simplified issue policies and guaranteed issue policies, the premiums for this coverage are likely to be very expensive. These policies are typically only issued to people of a certain age and remain valid up to a certain age. Older people who do not have enough money saved to cover the entirety of their end of life costs find this coverage attractive as it allows them to avoid placing that financial burden on their surviving loved ones.

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