The purpose of this article is to help you determine which type of life insurance policy best fits your needs.
To know which type of policy you need, you should first decide whether you want life insurance for only a relatively short term (term insurance) or life insurance for the long term (permanent insurance).
Once you’ve decided which type makes the most sense for you, you’ll have taken a big step toward choosing the right life insurance policy. To help you decide, we’re going to discuss five important questions you’ll want to ask yourself.
Here are the five questions, then we’ll talk about them one by one:
- Is there any reason you should consider owning a life insurance policy, other than for the death benefit? Many people own life insurance for reasons beyond the death benefit. Do any of those reasons apply to you?
- Do you know when your need for life insurance will end? The answer to this question will depend on your answer to the previous question.
- What is the cheapest kind of life insurance? What “everybody” knows may not be true for you.
- How important are guarantees to you when you chose a life insurance policy? Some policies guarantee virtually every component of the policy, while others guarantee far fewer components. (Some policies do not even guarantee to pay your family anything when you die—unless you die “on schedule”!)
- How important is predictability? Is it important for you to know what your annual premiums will be and to know they won’t go up? Is it important for you to know how much money the insurance company will pay your family when you pass away and to know that payment won’t go down or disappear?
5 Important Questions You Must Answer When Choosing a Life Insurance Policy
Ready? Let’s take those five questions one at a time.
Question 1: When deciding which type of life insurance policy to get, consider the question, “Why own life insurance, other than for the death benefit?”
A traditional term life insurance policy offers only a death benefit. A term policy’s death benefit is only for those people and organizations you care about. It benefits them, after you die—assuming you die before the term of the policy ends. Your only involvement with the policy is to keep paying those darn premiums—which go up, by the way, every time you renew the policy for another term—assuming your health and lifestyle (or the terms of the policy) allow you to qualify to renew.
A permanent life insurance policy gives you more than a death benefit legacy. A permanent life insurance policy also includes living benefits.
A permanent policy’s living benefits are for you. Now. While you’re still around to enjoy them. Sure, you’ll leave a legacy—a benefit for those you care about. But what if your life insurance policy generated dividends that could be used to make your premium payments for you? What if your insurance policy started paying you?
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That’s something worth thinking about.
Question 2: When will your need for life insurance end?
To answer that, you’ll need to decide if you are a short-term planner or a long-term planner.
Short Term: You can buy life insurance that will end in less than 24 hours. They used to sell it at the airport. It was called trip insurance. It was designed to pay a death benefit only if you died in an accident on a particular flight (or bus trip, train ride, or whatever). The coverage ended the moment you were safely deposited at your destination.
That’s really short-term planning!
You can also buy policies—term policies—that will last for just one year, five years, 10 years, and so forth, if you’re a short-but-not-that-short-term planner.
Long Term: Someone who plans long-term might say, “Well, at first I thought my spouse wouldn’t need any extra money if I could just wait to die until after the kids start school 10 years from now. But I’m looking ahead now, to when we’re 60 or 70 or even 80.
“What if I die first? Would it be a good idea to plan for an income for my spouse in case that happens? Goodness knows, we can’t really count on our investments. They may shrivel up before we do!”
And someone who understands the living benefits of permanent life insurance likely never wants to give them up! When would you ever say, “Well, I guess I don’t need any more tax-free retirement income!”
Question 3: Which type of life insurance is cheapest?
“Everybody” knows term insurance is cheaper than permanent insurance. But that’s only if you’re nearsighted.
You see, the price of a term insurance policy is guaranteed to go up every time you renew it for another term. But if you pick the right kind of permanent life insurance (we’re talking about whole life insurance here), the premium is guaranteed never to go up.
So, you will probably think term insurance is cheaper if you’re looking at just the next few years. But if you’re not nearsighted—if you’re looking 10, 20, 30 years into the future—you realize that a permanent policy can be much less expensive overall. And that’s even before you begin enjoying the living benefits.
Question 4: How important to you are a life insurance policy’s guarantees?
Here are five important facts you should consider:
Fact #1: A term insurance policy guarantees its death benefit only during the term of the policy. If you die even one day “late”—that is, after the end of the term—your policy is worthless. That’s why we said some policies won’t even guarantee to pay a death benefit when you die, unless you die “on schedule.” In fact, of all the millions of term insurance policies issued since the beginning of time, most have never paid a death benefit! They were either cancelled or they expired before the policy owner expired.
Isn’t a policy you’ve paid into for years and years—that then doesn’t pay out when you die—just about the most expensive policy you can imagine?
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Fact #2: Universal life and indexed universal life policies only guarantee a specific death benefit if you pay a premium that’s significantly higher than the policy’s “planned” or “target” premium. This “no lapse guarantee” premium—defined as “the highest premium permitted by the IRS for a policy classified as a life insurance policy,”—promises that the policy will stay in force for a set number of years. However, once the guarantee period ends, the policy could lapse unless an even higher premium is paid. And even then, the insurance company doesn’t guarantee you’ll have any cash value you can tap into as part of your living benefits.
What’s more, these policies don’t guarantee their premiums won’t go up. A universal life or indexed universal life insurance company is contractually free to readjust premiums at any time. A universal life or indexed universal life sales agent may show you an illustration that has premiums that don’t budge until you die, but if you ask him if those rates are guaranteed or if they’re just “projections,” he’ll confess they’re just projections—optimistic projections, at that.
Fact #3: Only with a whole life insurance policy can you know today the guaranteed minimum amount of income you can draw from your policy in retirement (or at any point along the way).
Fact #4: Whole life insurance has more guarantees than any other type of life insurance. Your premium is guaranteed, although it could go down. The death benefit is guaranteed, although it can go up, if your policy is properly designed. Even the growth of your cash value over time is guaranteed. But it could grow faster if your policy pays dividends (see next paragraph) and your policy is properly designed.
Fact #5: A dividend-paying life insurance policy has the potential of paying you dividends. Dividends are not guaranteed, but some life insurance companies (including those preferred by Bank On Yourself Professionals) have paid dividends every year for well over a century.
Question 5: How important to you is the predictability of your life insurance policy?
Our article How Whole Life Insurance Works discusses this question in detail. Here’s a time-saving summary of that article:
- Term life insurance premiums go up with every new term—sometimes quadrupling or more from one term to the next. But you can’t predict in advance what the renewal premium will be. And term life insurance builds no cash value.
- Universal life insurance premiums can go up if cash value drops due to lower-than-projected investment performance. Nobody can predict this.
- Variable life insurance premiums can also go up if cash value drops due to poor investment performance. Nobody knows in advance.
- Whole life policies are different. Whole life insurance premiums are guaranteed to remain level forever. In fact, everything about a whole life policy is predictable—except, of course, the dividends. (But a century-plus track record of paying dividends, even during the Great Depression and all the not-so-great recessions since then, is pretty hard to beat.)
There you have it: five questions about how to choose a life insurance policy. And only you can answer them. Think them through. Then talk to a Bank On Yourself Professional who is in a position to give you additional information to help guide your decision.
Request a referral to a Professional (a life insurance agent with advanced training on this concept) who will analyze your particular situation, prepare a Personalized Solution report for you, and answer all your questions. There is no cost or obligation for this service.
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