UPDATED: Mar 26, 2020
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Forrest Gump is one of my favorite movies. And who can forget Tom Hanks’s iconic line that begins with, “Life is like a box of chocolates…”?
While watching the movie again recently, it hit me that life insurance is a bit like a box of chocolates. There are some basic choices that may look similar on the outside, but within them, there’s a plethora of options available that make them unique. Some may suit your tastes and needs; others may not. Here’s my take on them—from a confectionary standpoint:
Term Life Insurance — Milk Chocolate
Term life insurance is the most affordable and straightforward type of life insurance. With no bells and whistles like cash value accounts, investment accounts, policy loans, or long-term care benefits, it’s inexpensive and uncomplicated. Your beneficiaries get paid a death benefit equal to the amount of your policy if you die while your policy’s term is in effect.
Some life insurance companies have started adding variety via additional features and benefits to basic term life. You might find a few of these options included in the pricing of your policy:
Accelerated Death Benefit — Milk Chocolate with a Caramel Center
This option enables terminally ill policyholders to receive part of the policy’s death benefit early. This could help you and your family pay for medical expenses, hospice, or other treatments and services that help provide care to you or extend your life if you’re facing a life-threatening illness.
Conversion Benefit — Milk Chocolate with a Dark Chocolate Mousse Center
This benefit gives the policy owner the option of “converting” a term life policy into an approved permanent life policy (typically a universal life policy) from the same company. An advantage of this feature is that you wouldn’t have to complete another application or undergo another paramedical exam to prove insurability when converting to a permanent policy.
Return of Premium (ROP) Term Life — Milk Chocolate with a Caramel & Cashew Center
ROP term life enables policy owners to get their money back if they outlive their policy term. So if you have a 30-year term life policy and are still living when the term expires, the life insurance company will return 100% of your premiums. And if you cancel the policy before it expires, you may receive a portion of the amount you’ve paid for your premiums. This type of term life costs more than straight up term life insurance, but it ensures you get money back if no death benefit is paid.
Term Universal Life (UL) — Dark Chocolate
Term UL is a universal life policy with a premium structure like that of basic term life. Like standard term life, the policy is in effect for a period of time, and the premiums are guaranteed to stay consistent during that term. Also, it offers some features (like cash value) of a UL policy, and it provides more options than regular term life to extend the policy at the end of the term.
Whole Life Insurance — Dark Chocolate with a Buttercream Center
Now we’re getting into the rich stuff! Whole life insurance offers level premiums and protection for as long as you live with no set term. With features that include benefits like cash value accumulation and policy dividends, whole life policies can have expensive premiums and may include high penalties for cancellation. Whole life might be a palatable option for you, but be prepared to own your policy for a long time (at least 20 years) before you reap a good return on your investment.
Universal Life Insurance (UL) — Dark Chocolate Truffles
The most decadent of life insurance options, universal life is a permanent life policy that includes such features as cash value accumulation, policy loans, varying premium payment amounts, and varying death benefits. With universal life, you can set premiums to terminate at a certain age such as your planned retirement age or some other period. The investment portion of your policy can be variable or guaranteed. If your cash value accumulation grows enough, you can use it to subsidize the cost of your policy.
UL’s flexibility is its biggest advantage. Depending on your goals, a policy can be designed to accomplish maximum death benefit protection, maximum cash value accumulation, or a mixture of both.
Just the Tip of the Taste Buds
Like a box of chocolates, there are many types of life insurance to pick and choose from. Deciding which type of policy and features are right for you and your loved ones is a bit more complicated than satisfying your sweet-tooth, though. You can’t bite into them and put them back in the box. Be sure to do your homework and talk with a trusted insurance professional or financial advisor before deciding on the type of life insurance that will provide you with the most value and satiate your hunger for peace of mind.