By now, we hope you recognize the important role that life insurance plays in a financial plan. For this final installment in our series, we want to answer the question: What type of policy is right for me?
The goal of today’s blog is to provide an initial framework for how to begin thinking about this question. We’ll discuss the basic types of life insurance, and move into how to choose the right option for you.
The Most Common Types of Life Insurance
To begin, it is important to highlight the two most common styles of policy that are available. Term Life Insurance and Permanent Life Insurance are the types that you have probably heard about before.
Let’s begin by defining these types, and then we can talk about how to choose:
Term – These policies do not accumulate any cash value. They are written for specific lengths of time during which the initial premium will remain level. The most popular term lengths are 10 years, 20 years or 30 years.
Permanent – These policies are designed to last for a person’s entire life expectancy. Most of them contain cash value accumulation features and a premium that is intended to remain level for the remainder of a person’s life.
Other Policy Types
There are other forms of life insurance policies that blend characteristics of term and permanent life policies together. Some examples are Return of Premium term policies and Guaranteed Universal Life policies. The former contain some cash value while the latter are designed to be permanent policies and have very little to no cash value accumulation.
With that broad-strokes overview of the types of life insurance policies available, it is now time to tackle the topic of why you would want one type of policy over another.
How to Choose the Right Type of Life Insurance
As we have discussed in other blog posts in our Life Insurance Series, we strongly advocate for taking a needs-based approach to determining which policy is right for you.
That means that you start with what needs you have for life insurance (such as debt payoff, income replacement, or buy-sell agreement funding) and then determine which policy best meets these needs in the context of your overall financial plan.
Let’s explore some of the benefits and downsides to Term and Permanent policies:
Term Life:
Benefits
- They carry the lowest premium cost per dollar of death benefit (that is, the best “bang for the buck”).
- Initial policy period options align well with many people’s needs. Most carriers offer term policies that last between 10 and 30 years.
Downsides
- Since term life policies will eventually expire, they do not work well for needs that are more permanent in nature.
- The premium costs skyrocket after the expiration of the initial policy period.
Permanent Life:
Benefits
- These policies are designed to never expire and, therefore, can be good considerations for clients with wealth transfer goals.
- Some contain features that provide critical illness and long-term care benefits.
- Some have the potential to earn dividends and accumulate cash value.
Downsides
- These policies carry significantly higher premium costs than term life policies for comparable death benefit amounts.
- Some policies are very complex and require careful annual analysis.
Selection Considerations
As you can tell from the above comparison, term life policies are ideal for covering needs that are temporary in nature, due to their comparatively low premium costs and long initial policy periods. Some popular examples of needs that term life policies can be a great hedge for are debt payoff, income replacement while working, caring for minor dependent children, and funding business buy-sell agreements.
As the name implies, permanent policies are ideal for covering needs that are permanent, such as wealth transfer goals or funding a special needs trust for the care of a family member with special needs or a disability.
Unique Solutions for Individual Lives
In conclusion, each person’s financial plan is different. The best life insurance policy design for you requires careful analysis in the context of your other goals.
If you, or someone you know, would benefit from this holistic planning process, please contact us!
