The Types of Life Insurance

There are many types of life insurance being sold today, and what is appropriate for you and your family is dependent on your specific situation. There is no right type of policy that fits everyone’s needs. The following is a brief description of some of the types currently available and their pros and cons.

Group Life Insurance
These policies are quite often offered by an employer or union for the benefit of the employee. At entry level they often provide one or two year’s annual salary as the death benefit, with an option to purchase additional coverage to a specified limit.
        
Pros: 

• The employer may pay for the “basic” benefit with the employee paying for the optional insurance.
• The premiums are typically low when the employee is in his/her 20s, 30s, and even into their 40s.
• There is no underwriting. The only qualification is employment or membership with the sponsoring organization.

Cons:

• The amount of insurance available may not be adequate for a family’s needs.
• The policy terminates when you leave employment or membership with the sponsoring group. Or, in some cases remains in force during retirement with a drastic reduction in death benefit.
• Since the policy is not medically underwritten, if you are a healthy, non-smoker, you may be paying higher premiums than getting your own medically underwritten policy.
• Premiums usually increase every five years.

 
Term (or Temporary) Insurance
Term policies as their name describes, is meant to protect your life for a specific length of time. It may be for a single year, five years, ten years, 20 years, or even 30 years. Most term policies today are renewable at the end of the term, but the premiums increase significantly. With some variation by insurance carriers, most term policy’s “term” ends around age 75. And, even though the policies may be renewable, the increase in premium makes the continuation of the policy prohibitive.

Pros

• Usually the least expensive type of life insurance available.
• Most life insurance companies allow policy holders to “convert” their term policies to one of their permanent policies without additional underwriting.
• May be used as a guarantee for a debt with the death benefit assigned to the creditor to the limit of the loan.

Cons

• The “term” allowed by most insurance companies can cover you for the least likely time you may die, and become cost prohibitive  when you are most likely to die (according to current life expectancy values).
• Insurance companies only have to pay a death benefit on less than 2% of all term policies written.

 
Permanent Life Insurance
         The final category are permanent policies. They have several variations including; Whole Life Insurance, Universal Life, Indexed Universal Life, and Variable Universal Life. These products remain in effect as long as the premiums are paid, usually with the same premium throughout the entire contract. Since they continue for one’s entire lifetime the insurance company will pay a death benefit 100% of the time. In many cases they generate a cash value that may be accessed during the policy owner’s lifetime.

Pros

• Cash value may be used to help with various expenses during one’s lifetime, such as, house repairs, college expenses, or as a supplement to their retirement income.
• If taken out early in one’s life, premiums are affordable and in many cases less expensive that equivalent term policies taken out later in life.
• Premium remains constant for entire life.

Cons

• Most expensive initially of the three categories.
• Cash value may be taxable if policy is terminated before death.

There are also many “hybrid” policies marketed by various companies. These will combine the features of two or more types listed above.

When you are setting up a financial plan for you and your family, or specifically in the market for life insurance, the first step is to find a trusted financial advisor who can explain your options in regards to your specific needs.
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For more information on the different types of life insurance or for help determining which option is best for you, please contact Russ Morris.