Unlike other insurance policies, which typically dictate how the policyholder can use a claim payout (i.e., an auto payout can only be used for a car), following the death of the policyholder, life insurance benefits can be distributed for a wide variety of expenses that the beneficiaries deem necessary.
The most common expenses a death benefit covers include:
- Funeral and burial costs
- Mortgage payments
- Tuition payments
- Personal debt, including outstanding loans or credit card bills
- Day-to-day expenses, like groceries
- Savings investments
- Charitable Donations
However, it’s important to note that you can use life insurance while you are still alive, depending on the type of policy you hold.
Which brings us to...
What Type of Life Insurance Policies are Available?
The most common types of life policies are Whole Life, Universal Life, and Term Life. In this blog, we will highlight the similarities and differences of each policy type, as well as their pros and cons. By outlining what options are available, we hope you become more adept when it comes to choosing the right policy for your specific needs and financial situation.
Furthermore, we will delve into which insurance types can help you earn more money while you’re still alive. Being well-informed on life insurance options can not only benefit your loved ones; it can also bolster your finances, provided you take advantage of your policy.
What Type of Life Insurance Policies are Available?\
The most common types of life policies are Whole Life, Universal Life, and Term Life. In this blog, we will highlight the similarities and differences of each policy type, as well as their pros and cons. By outlining what options are available, we hope you become more adept when it comes to choosing the right policy for your specific needs and financial situation.
Furthermore, we will delve into which insurance types can help you earn more money while you’re still alive. Being well-informed on life insurance options can not only benefit your loved ones; it can also bolster your finances, provided you take advantage of your policy.
What is Whole Life Insurance?
Whole life insurance is a type of permanent policy that provides coverage for your lifetime (so long as the premiums are paid). There is no set term limit, so the policy remains active until you pass away. Upon death, the people you named as your beneficiaries will receive the death benefit (the monetary value that your insurance policy covers).
A whole life policy includes a savings clause (referred to as the “cash value”), along with the death benefit. Your savings can accrue interest on a tax-deferred basis. As the policyholder, you can also access this cash value at any point to pay for things like mortgages, medical bills, debt, and education. To access cash reserves, you may request a withdrawal of funds that is tax-free, up to the value of the total premiums you have paid up to that point.
To build cash value, you can submit payments greater than your monthly premium, known as paid-up additions. These contribute more value both to the death benefit as well as the cash value.
Pros of a Whole Life Insurance Plan
Level Premiums: Premiums for this type of plan typically remain level throughout the life of the policy, so there are no surprises in cost hikes.
Cash Value Accumulation: A portion of each premium payment goes into a cash value account, which grows on a tax-deferred basis. This cash value can be accessed for various purposes while you’re still alive.
Tax-Deferred Growth: The cash value growth is not taxed, making it a preferred investment for a lot of people.
Policy Loans: You can even take out low-interest loans against the cash value, thus providing a source of liquidity for various financial needs.
Dividend Payments: Some insurance companies offer dividends to their policyholders. What are dividends? In short, a dividend is an investment made by your insurance carrier. They’ll use a portion of their policyholders’ premiums and invest them. If the company succeeds at keeping expenses down and the investment accrues money, a portion of the surplus will go back to their policyholders.
However, there is no guarantee that the investment will succeed. Also, most insurance companies that participate in dividends don’t disclose where they are investing or how much the returns are. You can learn more about dividends here.
Asset Protection: Cash value for a whole life policy is typically protected from creditors in most states.
Cons of a Whole Life Insurance Plan
Higher Premiums: Whole life insurance generally has significantly higher premiums compared to term life insurance, largely because those premiums rarely increase as you age.
Limited Flexibility: Whole life policies offer less flexibility in adjusting coverage amounts or premium payments. Changing your policy can be a big pain in the butt (to put it frankly) and may cause you to incur fees.
Complexity: The savings component of whole life insurance, including the cash value and dividends, can be challenging to understand fully and optimize to your benefit. If you are seeking straightforward and simple coverage, this type of policy may not suit you.
Limited Investment Choices: Policyholders have limited control over how their cash value is invested within the insurance company's portfolio. This lack of investment options may result in lower returns.
Surrender Charges: If you decide to terminate your policy prematurely, you may incur “surrender charges” and receive a reduced cash value payout. These charges can erode the value of your investment.
Delayed Accumulation: A significant portion of your premium payments in the early years of a whole life policy goes toward commissions and administrative fees. This results in the cash value taking a few years to accumulate.
Inflation Erosion: Over time, the purchasing power of the death benefit may be eroded by inflation, potentially leaving beneficiaries with less real value.
What is Term Life Insurance?
Next is term life insurance.
This type of policy is a great option for young adults who may not have the financial independence to invest in a whole life policy, but still want to ensure their family is provided for if they pass. Term life coverage is designated for a specified period, known as the "term." Unlike Whole Life or Universal Life insurance (which provides lifelong coverage), this type of policy is designed to offer financial protection for limited time. (Think: renting your insurance plan instead of owning it.)
Generally, the fixed terms are either 10, 20, or 30 years. If you pass away during your term limit, your insurance company will pay out a death benefit to your listed beneficiaries.
Pros of a Term Life Insurance Plan
Affordability: Term life insurance is often more affordable than permanent life insurance because it provides coverage for a limited period and does not include a cash value component.
Term life insurance is the most common policy among young adults and families. It provides a substantial death benefit at a lower premium cost, making it more enticing to younger people who may not be able to afford higher premiums.
Renewability: Many term policies offer a conversion option which allows you to convert your term policy into a permanent life insurance policy if you decide you want to switch. Converting your policy rarely necessitates a medical exam.
Customizable Coverage: You can choose the coverage amount (death benefit) and term length based on your financial goals and needs.
The Cons of Term Life Insurance
No Cash Value: Unlike whole life insurance, term life policies do not accumulate cash value or offer investment features. You pay premiums solely for the death benefit, and there is no savings component. They do not build up equity nor are dividends offered. Once your term is up, you do not get any returns on your investment.
Premium Increases: While term life insurance initially offers lower premiums compared to whole life insurance, after your term is up, premiums can increase significantly when you renew your policy.
Limited Customization: Term policies are relatively straightforward and do not offer the level of customization and additional features found in permanent life insurance policies.
Complex Renewal Process: Renewing a term life insurance policy can be complex and may involve medical underwriting, which could result in higher premiums or denied coverage if your health has deteriorated.
What is Universal Life Insurance?
A universal life insurance plan is very similar to a whole life policy. Universal life (also referred to as adjustable life) is a permanent policy that extends a lifetime. It provides a death benefit to your named beneficiaries and offers a cash value component.
However, a universal life policy offers more flexibility than its counterpart. With this type of protection, you can modify your premium payments as well as your death benefit aggregate, provided you meet specific criteria.
Just like a whole life policy with a dividend option, when you pay your monthly premiums on a universal plan, part of your money goes toward your coverage while the rest is invested by your insurance carrier to build cash value.
Pros of Universal Life Insurance
Flexible Premiums: Universal life policies typically allow policyholders to adjust the premium payments within certain limits. This flexibility accommodates changes in your financial circumstances, making it easier to manage your premiums over the duration of your life.
Adjustable Death Benefit: Based on the specifications of your policy, you can amend the death benefit amount.
Tax Advantages: The cash value growth within a universal life policy is typically tax-deferred, meaning you won't owe taxes on the earnings until you withdraw them. Policy loans and withdrawals may also be tax-free up to the amount you've paid in premiums. If you borrow more than your premium aggregate, you will likely have to pay taxes on the differential amount. You will also have to pay interest if it the loan isn’t paid back in a specified time period.
Liquidity: Policyholders can access the cash value for various purposes, such as supplementing retirement income, paying for medical expenses, or covering premium payments during financial hardship.
Interest Rate Options: Some universal life policies offer different interest rate options. You can choose between a fixed interest rate, or one tied to the performance of underlying investments.
Creditor Protection: In many states, the cash value in a universal life policy is protected from creditors, offering an additional level of financial security.
Flexible Premium Payment Periods: Some universal life policies offer flexible payment options. You can choose to pay your premiums in a lump sum, over a limited number of years, or throughout your lifetime.
Survivorship Policies: Universal life insurance can be structured as survivorship policy which is often preferred with married couples. This is a “joint” policy that allows your family to receive a cash payout if both you and your partner die. The advantage of this (as opposed to individual policies) is that it’s generally more cost-effective and is beneficial for estate planning.
Cons of Universal Life Insurance
By now, you are probably wondering why someone would choose to have whole life insurance over universal life insurance. While universal life insurance offers more flexibility to suit your current status, there are some drawbacks.
No Cash Value Guarantee: The cash value component of a universal life policy is often tied to the performance of underlying investments, such as market-based accounts or interest rates. This variability means that the cash value growth may not be as predictable or guaranteed as with whole life insurance, which guarantees cash value growth.
Interest Rate Risk: Universal life policies are susceptible to changes in interest rates. If interest rates decline, the cash value growth may suffer, affecting the policy's performance and sustainability. Whole life insurance provides locked-in interest rates.
Management Required: To optimize the benefits of a universal life policy, you really need to actively monitor your premium payments, cash value growth, and investment options. This level of involvement may not be suitable for everyone, as it requires ongoing attention.
Costly Premiums: Universal life insurance premiums can be higher than those of term life insurance or even whole life insurance. This cost factor may make it less affordable for some individuals.
No Guaranteed Death Benefit: Unlike whole life insurance, which guarantees a death benefit payout, universal life insurance does not offer the same level of death benefit protection. If cash value growth underperforms, the death benefit may be at risk.
Benefits of Starting Early
Young adults enjoy more life insurance benefits than those who wait until they are middle-aged or older to acquire a policy. This is particularly true if you choose a permanent life insurance plan.
For starters, it’s easier to get approved for a policy. Younger people tend to have less health problems than their older peers. As such, young adults generally pass medical exams effortlessly and are approved quickly.
Insurance carriers can deny an individual life insurance if they deem the individual to be “high-risk.” If your medical assessment reports a lot of health concerns, your carrier can either quote you higher premiums or refuse to insure you. That being said, insurers can also deny coverage if your history exhibits questionable behavior like DUIs, tobacco use, and drug rehab or psychiatric hospital visits.
But if you are young, have a clean record, and pass a medical exam, your insurance premiums will be quite low. If you decide on a whole life insurance policy, you will be locked into those low rates for the tenure of your policy.
Secondly, the sooner you open a permanent life policy, the more cash value you can accrue, over your lifetime. This will lead to greater returns on your investment (that are tax-free!) and also increase the value of your death benefit for your loved ones.
How to Determine the Right Life Insurance Policy for Your Needs
That being said, don’t beat yourself up trying to decide on the right plan. An insurance agent or broker is equipped to walk you through your options, but before talking with one, do some leg work so you can go into the discussion prepared.
To begin, assess your financial situation and goals. Determine how much money your family would need in the event of your passing. Consider factors such as outstanding debts, mortgage payments, educational expenses, and your family's standard of living. Your age, health, and current income level should also influence your decision.
Consider your budget when selecting a policy, as premiums can vary significantly. It's essential to strike a balance between the coverage you need and what you can comfortably afford. There is no point in getting life insurance if you can’t afford the premiums because you won’t be able to get back any money you’ve invested if your policy lapses.
Lastly, consider consulting with a reputable insurance brokerage firm as they can help you shop for a policy with several carriers, saving you time and helping you avoid going with the wrong carrier.
At Ashlin Hadden Insurance, our agents guide you through the complexities of different life insurance policies, explain the pros and cons, and help you find the most affordable coverage that aligns with your life goals. With our expertise, you can make informed decisions that provide the financial protection and peace of mind you and your family deserve.
Conclusion
The decision to acquire life insurance at a young age can offer a myriad of advantages that extend far beyond financial security. With lower premiums, guaranteed coverage, and the opportunity to build cash value, starting early can pave the way for a more stable and prosperous financial future.
Understanding the different types of life insurance – whether it's the simplicity of term life insurance, the lifelong protection of whole life insurance, or the flexibility of universal life insurance – is crucial. Each option has its own set of pros and cons, making it essential to carefully consider your unique circumstances and long-term goals.
To speak with one of our trained insurance brokers who can walk you through the process, please take a few minutes to fill out this form and one of our agents will contact you. Alternatively, you can give us a call at (765) 432-8989.
Whatever direction you decide to go with regards to protecting your future and your family, we at Ashlin Hadden Insurance wish you nothing but health and happiness!
TL;DR/Summary
- Young adults in America have experienced significantly higher mortality rates since 2010.
- Leading causes of death among young adults include drugs, suicide, automobile accidents, medical conditions, influenza, and pregnancy/childbirth.
- Life insurance can provide financial security and future benefits.
- Life insurance is a financial contract between an individual and an insurance company, offering a death benefit to beneficiaries.
- Death benefit can cover expenses like funeral costs, mortgage payments, tuition, personal debt, daily expenses, savings, and charitable donations.
- There are different types of life insurance: Whole Life, Universal Life, and Term Life, each with its pros and cons.
- Whole Life Insurance provides level premiums, cash value accumulation, tax-deferred growth, policy loans, dividends, asset protection, but has higher premiums, limited flexibility, complexity, limited investment choices, surrender charges, delayed accumulation, and inflation erosion.
- Term Life Insurance is affordable, offers customizable coverage, but has no cash value, premium increases, limited customization, and a complex renewal process.
- Universal Life Insurance provides flexible premiums, adjustable death benefit, tax advantages, liquidity, interest rate options, creditor protection, flexible premium payment periods, survivorship policies, but lacks a cash value guarantee, is susceptible to interest rate risk, requires management, has costly premiums, and no guaranteed death benefit.
- Starting life insurance early is advantageous due to easier approval, lower premiums, and higher cash value accumulation.
- To determine the right life insurance policy, assess your financial situation, goals, budget, and consult with an insurance brokerage firm like Ashlin Hadden Insurance.
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