So you’ve decided to become a “responsible adult” and buy life insurance. Maybe you’ve even decided how much life insurance you feel is appropriate, but the question still remains: what kind of life insurance should you buy? There’s level term, stepped term, convertible term, ordinary whole life (OWL), Universal Whole Life, (UWL), Variable Universal Life (VUL), and accidental death policies. There are more, but these are the ones you’ll run across most often. These break down into three different categories: Term Insurance, Whole Life, and Accidental Death, all three of which may be available in a Group Policy.
Group Insurance
Group insurance is life insurance that is available through your employer or through a group that you belong to. For instance the Financial Planning Association has a group policy available to members since most of its members are solopreneurs and either can’t get or can’t afford a company policy. Group policies tend to be either Term or Accidental Death and Dismemberment policies. The difference between group policies and individual policies is that the group is what is underwritten instead of the individual, so that individuals have easier access to life insurance coverage. Unfortunately many group policies end coverage when you leave that employer, so you will need to make sure your new employer has coverage for you, or go out and buy your own if you leave for any reason.
Whole Life
Whole life is what it sounds like, life insurance that covers you for your whole life, as long as you remember to pay the premiums. Because the coverage can lapse if premiums go unpaid, it’s a good idea to talk to your financial professional about adding a loved one as an interested party with the insurance company so they can receive notice if the policy is about to lapse (e.g., if missed premium payments is about to cause the policy to drop). Whole life builds up a cash value over time and different types of whole life do different things with this cash value.
Ordinary Whole Life
The cash value receives a set return based on the policy documents, which is reduced by the fees internal to the policy
Universal or Adjustable Life
The face value of the life insurance may be adjustable at certain times, and there may be the option to use the cash value of the policy to pay your premiums as long as the cash value isn’t depleted
Variable Life
The cash value is invested in stocks, bonds and mutual funds instead of a savings account, which means the cash value may increase more quickly, or disappear depending on the markets
Variable Universal Life
This combines the underlying investments of variable life with the adjustable face value and premium payment options of universal life
When do you need Whole Life?
When you need life insurance for your entire life. If you have a significant amount of assets and your estate will owe estate taxes, then a permanent life policy is a great way to transfer wealth without taxation, or to pay estate taxes so that the assets you have built up will transfer to your heirs without a large tax burden.
When do you not need Whole Life?
If you have less than $10 million in net worth and aren’t likely to accumulate that much wealth before you die, then you likely don’t need whole life coverage.
Term Insurance
Term insurance is life insurance that covers you for a predetermined period of time, or term. You will often see term insurance listed as 15-year term or 20-year term, etc. This means that you have guaranteed coverage for that period of time. Term does not have a cash value, so you are paying for just the insurance coverage, not for additional savings within the product, so term can be significantly cheaper than whole life. There are three main types of term policies, renewable term, level term, and decreasing term.
Renewable Term
The premiums go up on renewable term policies over time based on what the contract says, for instance your rates may go up each year, or they may go up every 5 years. The policy is renewable for a set number of years.
Level Term
Level term has level premiums for the entire term of the contract. This means the premiums are higher to start with than renewable term, but they don’t go up over time. Over the life of the contract, level term is usually a better deal.
Decreasing Term
With decreasing term, the face value amount of the policy decrease over time. This keeps the premium cost down as your need for insurance decreases. This type of policy is often tied to mortgages or other large debts.
When do you need Term Life?
If you’re still supporting children, paying off a house, or have others relying on your paycheck, term can help you cover the needs of your dependents until you’ve built up your assets to the level where you no longer need insurance. Oftentimes someone who has saved for retirement no longer needs life insurance since the kids are out of the house, the house is paid down or entirely paid off, and they are no longer earning an income that needs to be protected.
When do you not need Term Life?
When you either have an estate tax problem, or you have enough assets to protect your dependents, then you do not need term life insurance.
OK, but how do I BUY Life Insurance?
Insurance is still sold primarily on commission. If you're working with a financial advisor, ask for a referral to a "low load" insurance agent who will take the advisor's advice on how much insurance you need (a discussion for a different day). If you don't have a financial advisor you can go directly to an insurance agent or an insurance broker to get a life insurance quote. A "broker" brokers the insurance transaction for you, and often has access to quotes from multiple companies. An "agent" acts on the behalf insurance company and tries to sell you their insurance. This doesn't guarantee that a broker will have a better deal, or that they will have your best interest in mind though. You can also find policies on your own through websites like SelectQuote.com. If anything makes you feel uncomfortable, step back and get a second opinion.
Be sure to ask how the insurance salesperson is paid, and how much they are paid for the policy they want to sell you. Also ask about fees and expenses in the policy. It is normal for them to exist, but knowing what they are can help you compare two policies (especially two whole life policies). Ask questions until you understand what you're being offered, then take time to think about it away from the salesman. You might not look at your life insurance policy again through the life of the term, so it is wise to ask questions now and make sure you're comfortable with the policy you will be paying for over the next 15-30 years.