Last summer, we wrote a post comparing the available varieties of life insurance to flavors of ice cream.
I remember, as a young teen standing in line at the Oley Turnpike Dairy after our summer youth softball league games, staring at the list of ice cream options wondering which one I should choose.
They all had their own appeal, but which one on the menu would serve my taste buds best in that moment?
Choosing life insurance is more complicated than that. Rather than instant gratification, selecting the right life insurance policy involves thinking about your family’s needs now and in the future.
The right type of policy (or combination of policies) depends on where you are in life and on what you can best afford. Yes, you want to protect your family’s financial well-being, but don’t you also want to live life while you’re here?
While your best bet is to talk with a qualified, trustworthy agent about your options, here are some basic pros and cons to help you wrap your head around the three primary types of life insurance: term, universal, and whole.
Term Life Insurance
Term life insurance provides a death benefit for a specific number of years (a “term”). Most commonly, policies cover 10, 15, 20, 25, and 30 years, but you can even apply for one- or five-year terms. The shorter the term, the lower the premium you’ll have to pay.
- Term policies are affordable. They have lower premiums than whole and universal life policies.
- Term polices are flexible. You can choose a term to meet your family’s financial needs through when your mortgage will be paid off, when your kids have finished college, etc.
- Many term policies are convertible. Within a certain amount of time, you can opt to change them to a permanent policy.
- Term policies expire (if you don’t convert them to permanent). Therefore, you need to apply for a new policy if you’re still living when your policy ends. As with all types of insurance, the older you are, the higher your premiums. So when you apply for a new policy after your expired one runs out, a new policy for the same term length will cost you more than you paid for the first term policy.
Tip – Look into getting a longer term policy from the start so your premium is locked in and your coverage lasts until you’re considerably older.
Universal Life Insurance
One of the two types of “permanent” life insurance, universal life is sometimes guaranteed (will not fluctuate), but most of the time it has flexible premiums, death benefits, etc.
- You can structure a universal life policy to last up to age 121.
- Universal life has a “cash value” providing the option to loan money from your account while you’re still alive.
- Universal life polices offer tax-deferred growth.
- Universal life offers flexibility in frequency of premium payments.
- Interest rates affect the performance of universal life policies. That affects the amount of the premium you pay and the cash value amount of your policy.
- Premiums can be too costly for young families and others without a lot of income to spare.
Tip – Universal life policies can be particularly helpful for estate planning purposes in situations where you’re expecting a large estate tax due at death.
Whole Life Insurance
Another permanent policy, whole life is similar to universal, but it has guarantees of premium, interest rate, death benefit, etc.
- You can structure a whole life policy to last up to age 121.
- Whole life has a “cash value” so you can borrow money from your account while you’re still living.
- Whole life polices offer tax-deferred growth.
- Young families and others without extra income beyond their living expenses may not be able to afford whole life insurance.
Tip – Whole life policies serve estate planning purposes well (particularly in situations where a large estate tax is expected at death).
What Type of Life Insurance Should You Choose?
Decisions, decisions! How can you see to the secure future of your loved ones without sacrificing quality of life now? Going gourmet with universal or whole may sound tasty, but will the higher premiums set you back in the long run?
Here’s some food for thought: Maybe a better bet would be to buy an affordable term life policy now and save separately on the side using the difference from what you would have paid on a permanent policy. You can get a term life quote quickly and conveniently online to gauge the cost.
Again, the right type of policy for each individual depends on many different factors. Don’t rush into a decision. Talk with a life insurance expert and review all the options thoroughly before making a decision.