Life Insurance Policies DemystifiedSep 01, 2023
We had a lot of response to our August newsletter on the different types of life insurance policies so we thought we would share it in the blog.
Term Life Insurance:
Term life insurance is a straightforward and affordable form of coverage that offers protection for a specific period, usually ranging from 10 to 30 years.
- Affordable Premiums: Term life insurance typically has lower premiums.
- Simplicity: It's easy to understand, with straightforward policies and no cash value component.
Things to think about:
- Term Life Insurance will expire and, should you elect to obtain a new term policy, the new premiums will be higher. The premiums for new life insurance policies are determined by our age and health at the time we apply for the insurance policy.
Whole Life Insurance:
Whole life insurance is a permanent life insurance option that provides lifelong coverage and includes a cash value component. (It is, in a way, "saving" your premiums to pay out your life insurance policy later.
- Lifelong Protection: Whole life insurance guarantees coverage for your entire life, as long as premiums are paid.
- Cash Value Accumulation: A portion of your premium payments goes into a cash value account, which grows over time.
- Borrowing Options: You can borrow against the cash value or surrender the policy for its cash value if needed.
Things to think about:
- Higher Premiums: Whole life insurance is more expensive.
- Complexity: Whole life policies can be more intricate, and the additional features may be confusing for some policyholders.
- Limited Investment Growth: The cash value growth is often modest compared to other investment options. This is because the insurance company is taking a percentage of the investment profits.
Universal Life Insurance:
Universal life insurance is similar to Whole Life Insurance as it provides lifelong coverage. Universal Life Insurance also has the added benefit of more flexibility in premium payments and death benefits.
- Flexible Premiums: Policyholders can adjust premium payments.
- Adjustable Death Benefit: You can change the death benefit as your needs change.
- Cash Value Growth: Universal life policies also build cash value over time, providing a savings component. Just like Whole Life Insurance, however, our returns on the "investment" will typically be lower than if you invested the premiums elsewhere.
Things to think about:
- Complexity: Like whole life insurance, universal life policies can be complex and require careful management.
More on Life Insurance:
How much life insurance should you have? The rule of thumb is 5 to 10 times your income.
However, this really depends on a lot of different factors:
- How much debt does your family have?
- What are the ages of the children?
- What do future expenses look like?
- Will there be college costs for children?
Another consideration is whether or not you would want a Whole Life or Universal Life Insurance policy. These policies are much more expensive and the loss of investment potential over a lifetime can be significant. Some people think it may be worth it as it gives them the ability to take a "loan" out against the cash value of the insurance policy. However, we can frequently take "loans" out against other investments as well. As a result, I would suggest this isn't a good reason to get these types of policies.
One Option: Laddering Term Life Insurance
Many people chose to "ladder" term life insurance policies.
This has the benefit of locking in lower premiums at a younger and healthier stage of our life.
It also has the built in ability to anticipate changing life insurance needs.
Here is an example of how it works:
A 30 year old with a young family who makes $100,000 a year obtains 3 term life insurance polices.
- 10 Year Policy with a $500,000 death benefit.
- 20 Year Policy with a $500,000 death benefit.
- 30 Year Policy with a $100,000 death benefit.
So what would that look like?
- If this person passes away at 35 years old, their family will get a death benefit of $1,100,000 which would cover the mortgage, the debt and supply monetary support to their spouse will raising young children.
- If this person passes away at 45 years old, their family will get a death benefit of $600,000. At this stage of life, the mortgage balance and debt should be significantly lower and the children have different needs.
- If this person passes away at 55 years old, their family will get a death benefit of $100,000. Once again, the decrease in benefits would reflect the families changing needs. At this time the mortgage may be paid off, the family may have no debt and may have significant investments. This family may no longer require a large death benefit.
Obviously, there is a lot to think about when it comes to life insurance. The most important thing is to get started on your financial plan!
Would you like some help? Check out our course Money Mastery and start charting your course towards a brighter and financially stable future.
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