Once an individual or family comes to understand their need for life insurance, the next question asked is typically; what type of life insurance is best for me? Others will simply ask for term insurance assuming that term insurance is the cheapest / lowest cost. That, of course, is not always the case. We’ll discuss why later in this two part blog post. First let’s define the different types of life insurance and the specific needs they best cover as we explore Term Insurance vs. Cash Value Insurance (Whole Life and Universal Life policies).
Term life insurance is designed for a limited amount of time, and not meant to be insurance to rely on for your entire life. There is basic Annual Term insurance; where the cost of the insurance coverage is recalculated (aka increased) each year. This type of term insurance may have a very low cost at first, but the increasing rate eventually becomes prohibitively expensive, especially past the age of 50.
A second type of term insurance is called Level Term. Level Term insurance has a guaranteed fixed premium for a specific amount of time. The most common periods are 5-year, 10-year, 20-year and 30-year level term policies. With these policies, the insured pays the same premium every year until the term expires. After that period the rate of the policy increases to what it would have been if it were an annual term policy. That rate increase is often so significant that many consumers cannot afford to continue the policy after the term expires.
Term insurance is a great tool to insure against the financial consequences of a premature death for a limited amount of time. Examples of needs that may be ideal for term insurance include a mortgage or other major loan payment and dependent children. Your financial obligation toward your children ends once they are out of college and live on their own. While the exact time period is different for every family, unless there is an underlying disability issue few people expect to be supporting their children well into adulthood. Similarly, mortgages and other major debts will typically have a finite period. Eventually the debt is paid off and the need to insure that expense against a premature death expires. Mortgage protection insurance can be either term or permanent depending on the consumer need and budget. Term insurance vs. cash value insurance should both be considered.
Term Insurance vs. Cash Value Insurance
If you are looking at term life insurance rates or are considering purchasing life insurance and want to know if term insurance fits your needs, you should look beyond just the annual premium. When considering term insurance vs. whole life, the best life insurance rates over your lifetime are not necessarily the polcies that are the lowest cost today. If you are insuring against a premature death for a finite amount of time, then term insurance may be the right choice. As stated above, it is an ideal too for life insurance to cover the cost of a mortgage of to be certain your children go to college in the case of a premature death. If we also consider term insurance with living benefits, we can consider the fact that the insurance may also pay a benefit in the case of a serious heart attack, cancer stroke or many chronic diseases that can prevent you from caring for yourself and earning a living wage to support your family.
However, also consider what term insurance does not do. This is where term Insurance vs. whole life gets interesting; it is not the right product to insure you for your entire life. Trying to use term life insurance for that means will almost always result in either a policy that is prohibitively expensive, or your becoming uninsurable at not being able find any company that will offer you a life insurance policy after your term insurance expires. The fact is, 98% of all term life insurance policies expire without being paid out. That means only 2% of term life policies end up paying a death benefit. Compare this to permanent / cash value policies where as long as you continue to pay the fixed premium the policy will eventually pay a benefit.
Expired term insurance is now a common problem with so many people having purchased only term insurance in the 1980s and 1990s as the philosophy of “buying term and investing the difference” became prevalent. Many of those people now find themselves in their late 60s through 80s, have no life insurance at all and in some cases are not insurable. These people finally understand they should have purchased at least some permanent insurance when they were younger and are now the main market for a product called Final Expense policies where there is no medical exam required. Unfortunately, Final Expense insurance is very costly on a per $1,000 of coverage and are limited to a maximum of $25,000 to $30,000 of coverage; just a little more than the cost of the average funeral, burial and plot.
For most people in their early stage of a new family and new home, a mixture of both term and permanent coverage is the right answer. The right answer isn’t term insurance vs. cash value inurance, but how to combine both to maximize coverage vs. need and budget. In our next blog post we will write about the different types of permanent coverage and show how they can be less expensive and cover more of life’s possible risks than term insurance.
Shield Insurance Solutions is independent. Our goal is to find the best insurance company and policy for you. We specialize in living benefit life insurance and work with nearly 100 different insurance companies in order to find the right policy at the right value for you. We are transparent and have been in the financial services industry since 1984. Our life products include Whole Life, Universal Life and Term Insurance and Mortgage Protection Insurance. As independent agents, we work hard to find the best life insurance company for you, with the best life insurance rates and value. We are based in Jupiter and Palm Beach Florida and licensed in almost every state. If you are shopping for a life insurance quote, we can show you what many of the top insurance companies will offer. The price differences will amaze you. Visit www.ShieldInsuranceSolutions.com to get a free life insurance quote comparison, or call us at (800) 847-9680.