According to a 2014 study commissioned by LIMRA, only about 60 percent of all people in the United States said they were covered by some type of life insurance in 2013. And about 25 percent indicated they needed more of that type of insurance.
If you’re among the 40 percent of Americans who currently aren’t covered by some form of life insurance, or if you’ve got life insurance but you need or want more, the information covered below should come in handy.
The Basics
One of the first decisions you have to make while considering life insurance relates to whether you should purchase term life or “whole life” insurance.
Term life insurance covers you for a specific period of time—such as 10, 20, or 30 years. If you pass away during that “term,” your beneficiary or beneficiaries will be paid what’s often referred to as a death benefit. If you don’t pass away during the term, on the other hand, the policy loses its value. (No one is paid anything, basically.)
Whole life insurance, which also is known as permanent or “cash value” life insurance, potentially can cover you for the rest of your life. Also, over time, these policies accumulate a “cash value” that you can borrow against (without being taxed) or withdraw. You can also leave those savings alone and let the entire amount be paid to your beneficiaries after you die.
Beyond That, Many Varieties and Options
To make things more confusing, there are a few varieties of term and whole life insurance from which you can choose.
The two types of term life insurance, for instance, are level term and decreasing term. If you buy a level term policy, the benefit will stay the same through the duration of whatever term you select. But if you buy a decreasing term policy, your benefit will drop as the policy ages.
Note: according to the Insurance Information Institute, almost all (97 percent) of the term life insurance policies purchased in the United States are of the level term variety.
There are many more varieties of whole life insurance, including whole life, universal life, variable life, and variable-universal life.
Whole life is the most common of all the permanent or cash value insurance plans. Whole life offers a death benefit as well as a savings element that grows based on dividends that the insurance company pays you.
Universal life adds some flexibility to the whole life model by allowing you to increase your policy’s death benefit or alter your premium payments.
Note: It’s important to keep in mind that if you stop or lower your premiums too much and your accumulated savings are used up, your policy may lapse and your life insurance coverage will end.
The main benefit of a variable life policy is that it lets you invest accumulated funds in stocks, bonds, and money market accounts. That means the value of your policy may grow more substantially, and more quickly, than with other whole life plans. But it also exposes you to more risk. There are even a couple ways you could lose money, as opposed to make money. One is if your investments don’t perform well. Another is if your policy doesn’t include a guarantee that your death benefit can’t fall below a minimum level.
Finally, variable-universal life policies combine aspects of both the variable and universal life plans mentioned above. Specifically, they allow you to vary premium payments, investments, and coverage amounts like you can with variable life insurance. And they also offer many of the same investment rewards and risks that are associated with universal life insurance.
A ‘Blended’ Option?
If you can’t decide between term life insurance and whole life insurance, you could always go with a “blended” policy that combines elements of both entities.
According to U.S. News, such policies “may generate higher near-term cash values and higher death benefits at life expectancy than whole life alone.” Also, blended policies, which are sold by many insurance companies these days, “can be competitive with term policies for some consumers.”
The Pros and Cons of Term and Whole Life Insurance
As you can probably imagine, there are positives and negatives associated with both term and whole life insurance policies.
The positives commonly attached to term life insurance:
- It can be worthwhile expense for younger individuals and families, who often need protection against the loss of income of a primary earner for a specific period of time in their lives
- As far as insurance goes, it is a relatively simple product, which makes it easy for people to shop around for the best rates or coverage
- Given its popularity, the market for selling term insurance is competitive
Term life insurance’s primary negatives are:
- It doesn’t accumulate a cash value over time like whole life insurance does
- At the end of the specified term, the policy is worth nothing
Here are some of the positives that tend to go along with whole life insurance:
- It can provide protection for your entire life
- As stated earlier, it accumulates a cash value, which you can borrow against or withdraw
- You can add a variety of riders to these policies, something that isn’t possible with term life insurance
- According to U.S. News, whole life insurance can make financial sense for people who are concerned about asset protection. This is most important where state law provides that the cash value and death benefits of insurance policies are not subject to claims by creditors.
And as for the negatives that tend to go hand in hand with whole life insurance:
- Initially, at least, the premium payments tied to this type of insurance generally are higher than those associated with term life coverage
- It’s probably not the best bet for retirees. Most people don’t need much life insurance at that time in their lives--unless they provide for their spouse, still have dependents, or need to fund their funeral expenses
How are Life Insurance Premiums Set?
Insurance companies look at a number of different factors to classify potential policyholders. Each classification pool represents a different level of risk for the provider, and the more risk you represent, the worse your classification and the higher your premium.
How old you are when you purchase your policy. The older you are at that time, the more expensive your payments are likely to be
Your general health. Insurance companies usually obtain this information by reviewing your medical records and by asking questions about your medical history, among other things
Chronic or pre-existing health problems. Among the issues that could negatively impact your premium payments or even keep you from getting this type of insurance: cancer, diabetes, heart disease, and sexually transmitted diseases
Smoking or excessive drinking. These habits can haunt you, and affect your life insurance premiums, even if you don’t currently partake in them. Companies may consider your activity over the last five years when calculating what to charge
Your driving record. This includes the number of accidents you’ve been in as well as any DUI citations, claims, or tickets you may have received
Engaging in dangerous activities. If you spend time flying planes, hang gliding, parasailing, rock or mountain climbing, skiing, or skydiving, for example, you’re probably going to pay more for life insurance
Having a hazardous job. If your occupation is a risky one, insurance companies are likely to consider you a greater liability and, thus, make you pay more for life insurance
A few other factors, too. Felony criminal activity, military service, and even foreign travel or residency can cause insurance companies to hike your rates
Don’t fret if you’re initially placed in a classification pool that results in you having to pay higher premiums than you’d like.
Adopting new hobbies, changing occupations, and improving your overall health could help you qualify for a lower rate class. So be sure to revisit your policy and check in with your agent every couple of years to see if you can reapply and save some money on your premiums.
References:
- Life Insurance Information
- What are the Principal Types of Life Insurance?
- What are the Different Types of Permanent Life Insurance Policies
- Life Insurance: It's More Than a Death Benefit
- Life Insurance Buyer's Guide
- Life Insurance Facts From LIMRA
- Which is Better for you: Term or Permanent Life Insurance?
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