Last month, we talked about WHY you may want to consider carrying life insurance coverage. We used the acronym LIFE to clarify four different purposes that life insurance can potentially serve. Using those four reasons, we then discussed the amount of life insurance that may be aligned with your purpose. (To reference last month’s article, click here.)
Today in Part 2, we will cover an overview of the TYPES of life insurance that are commonly found when shopping for this important coverage.
Again, the place to start when thinking about this is: WHY am I carrying this coverage, and what I am I trying to accomplish? Buyer beware: not all types of life insurance are created equal.
Types of life insurance:
At the most basic level, there are two major types of life insurance: term and permanent. I find it helpful to think of these like “renting” or “owning” a house.
Term (“Renting”) = you pay a monthly premium for a certain amount of time (called the TERM). If you die during the term, then your beneficiaries are promised a lump sum of money from the insurance company (called the FACE VALUE).
If you’re still alive after the term is up, the policy expires. Neither you nor your beneficiaries get the money, but you also no longer pay the premium.
So what’s the point? You’re paying for peace of mind – the concept behind insurance, pure and simple, with no bells and whistles.
This is usually the most common, and least expensive, type of life insurance coverage. Often you can find this through your employer, as it is not uncommon to attach a term life insurance option to an employer-sponsored healthcare plan. (Ask your Benefits Department if you’re curious.)
Permanent (“Owning”) = just like it sounds, this type of policy does not expire, unlike term insurance. Generally, permanent insurance remains in place until you are gone (as long as you keep paying the premiums). This could be 5 years or 50 years; the amount of time doesn’t matter. When you die, the insurance company promises to pay your beneficiaries a certain amount.
What is that amount? It depends. Permanent policies have multiple layers. In addition to the insurance layer, there is a savings/investment layer.
Planners argue whether or not this is a cost-effective way to save and/or invest. Permanent policies are more expensive than term policies, and the costs can be significant over time. Again, this is why it is important to consider the goals you are trying to achieve before taking out a permanent insurance policy.
There are many different sub-categories of permanent insurance (including whole, universal, and variable). My best advice if you are considering life insurance is to talk to a professional to help you navigate this. It’s best to look for an independent agent or financial planner, rather than a “captive” agent, who is the employee of one particular company and is usually required to sell you that company’s product, regardless if it is the best one to suit your needs.
Want to learn more? Click here for an article on Investopedia that goes that into more detail.
Shadowridge Asset Management, LLC does not offer tax planning or legal services, but may provide references to accounting, tax services or legal providers. They may also work with your attorney or independent tax or legal advisor.