Everyone knows death is inevitable, but nobody truly lives like they believe it. If they did, they would live life much differently. Life insurance is for those of us who want the peace of mind knowing that when we die, our loved ones won't need to worry about paying the bills. Life insurance is for the benefit of others, not ourselves and purchasing it is the most unselfish thing that anyone will ever do for their family. Understanding life insurance can be complicated and sometimes overwhelming to figure out. Simply stated, term types of policies have a specific time frame for temporary needs such as meeting a mortgage or your kids' education. Whole life or universal life insurance is for the person wanting to cover more permanent insurance needs like estate taxes or leaving a legacy for their family.
We work with people every day who struggle with these issues and fret over which type of coverage is best for them. We just recently met with a woman nearly 80-years-old who told us her husband never believed in life insurance. She did not see herself as independently wealthy and wished that her husband had made things easier for her. The extra worry and stress of selling stocks and consolidating other financial matters so soon after his death was agonizing for her and their only child. She came to us in hopes that she could make things easier for her daughter. That is what life insurance is all about.
If you have priced out life insurance policies lately, then you have discovered that permanent insurance costs more than term and much depends on the age of the person and their health. Since they both result in paying a death benefit that you select, why is there such a difference in cost? There are several reasons.
1) Term is less expensive but it is designed to last only for a specific period in your life. No cash value builds up within the policy. No extra money going toward a “slush fund” means the premiums are lower. You may ask, “Why pay more than I have to?” Unfortunately, you may find out why when you’re short on money at a time when you need it the most and the premium is due. A permanent policy may have enough cash value to allow you to retain coverage without making a premium payment right now. Permanent policies are often called universal life insurance and whole life insurance, although there are also variations of each.
2) Term insurance policies don’t pay out death claims at the same percentage as permanent policies because coverage may end prior to death. A permanent policy is just that, permanent. A term policy may end at age 60, but the insured dies at age 65...with no ability to file a claim. A permanent policy would have paid a death claim to the beneficiaries of the 65-year-old. In fact, many newer policies don’t endow (jargon for when the insured gets paid the death benefit, even if alive) until age 120 – talk about high hopes for our life expectancy! Not to confuse you any further, but a permanent policy can lapse, resulting in no coverage. We’ll leave that topic for another day.
3) You can’t always buy a term policy as you get older because the life insurance companies do not offer them beyond a certain age. For example, if you were 20-years-old, you could purchase a policy for a term of 5 to 30 years. Some carriers even offer 35-40 years. However, if you were 55, you would most likely be limited to a 15 year policy. Age 75? You can forget a term policy, but depending on your health, you may be able to purchase a permanent policy.
So how do you choose an insurance policy? It depends on your needs, circumstances and budget. Having an Insurance coverage audit on any existing plans will help you determine if it is cost effective to purchase a replacement policy. Getting insurance quotes is just the start. Obtaining competitive life insurance quotes online is easy enough, but the key is to find someone you trust, who is also a licensed insurance agent. They will take the time to educate you on your choices and help you make a well-informed decision that is just right for you. Buy a life insurance policy that fits, because just like marriage (well, most anyway), it’s till death do you part.