The two most popular types of individual life insurance policies are term life insurance and whole life insurance, also referred to as permanent life insurance. One may also be enrolled in group life insurance such as policies offered through one’s employer, which also may have options available such as purchasing additional coverage over and above the standard coverage offered to everyone.
Older clients may be offered life insurance products which pay limited benefits and are geared toward end of life expenses. Standard life insurance products tend to be very expensive in our later years, if they are offered at all, and this supplemental coverage allows one to purchase at least a small policy at a relatively modest cost.
For those who aren’t too old to qualify to purchase standard life insurance products, the choice is between term and whole life, and about 40% of clients select term policies, with 60% choosing a whole life insurance product of one kind or another.
Term life insurance gets its name by being in effect for a given term only, and when the term is up, it needs to be renewed or it will expire. Often times, clients select a longer term, like 20 or 30 years, after which the plan is to let the coverage end, and hopefully they will no longer need it.
With whole life, you can keep the policy in effect in theory for your entire lifetime, although the actual coverage itself does become very expensive in one’s later years, especially when one becomes elderly and the probability of death goes up considerably.
Each type of policy has its plusses and minuses. Whole life policies produce more profit for insurance sales people and insurance companies, and insurance advisors do play a central role in choosing which type one buys. It is important though to look at all sides to decide which one you want to go with and how much coverage you need, and not just rely on a sales person’s recommendations.
Unlike whole life insurance products, which have an insurance side and what we could call an investment side to them, term life is just life insurance without anything else built in to the cost of it.
In deciding between whole and term life, we need to think about what we’re looking to do with the policy, whether we’re looking to just buy life insurance for a given period of time or whether we’re looking to use life insurance as a more comprehensive financial product which can provide us with benefits beyond just having our life insured over a given period of time.
Term life insurance policies cover us over a set number of years, from 1 to 30, the term of the policy. At one time, 1 year terms used to be the most popular, although nowadays people select longer terms typically, with 20 years being the most popular currently.
It makes sense to select a longer term if one is able to manage it, even though shorter terms are cheaper. If a person is 35 and selects a 1 year term, they are covered from 35 to 36. If they choose a 30 year term, this will cover them from 35-65.
The early years will be cheaper to underwrite with the cost going up each year because as we age the chances of us dying increase. The 30 year term in this case would be priced at the average cost over this time, where if we go for the 1 year term the cost will be less but each renewal will cost more.
When we look at it this way, it actually may make sense to choose shorter terms if one’s financial means is very modest, and they also expect their income to go up over time. For those who can afford to go longer, which is most people, choosing longer terms may make more sense, especially if you consider yourself at higher risk for conditions that may cause your premiums to go up a lot as you age.
Clients can choose between a fixed or “level” benefit and a decreasing benefit, and although level benefits do cost more, almost everyone chooses this. Choosing decreasing benefits can make sense though if your insurance needs decline with age, from accumulating more wealth.
Whether the cost of premiums remain fixed during the life of the policy or whether they are subject to being increased depends on the policy, although we may expect to pay more for policies with fixed premium costs over the term.
Perhaps the biggest benefit to longer fixed terms is that we don’t have to requalify so often, or in some cases not at all, where if we choose shorter terms we are subject to the risk of being reassessed at a much higher rate or perhaps not being able to renew at all if our life expectancy has been reduced enough.
There are limitations though, as insurance companies will not generally insure someone beyond the age of 80, and rates escalate quite dramatically as we look to extend these policies to include the senior part of our lives.
Whole Life Insurance Policies
While there are a few choices involved in going with term life insurance, it is considerably cheaper than whole life. Whether we decide to choose whole life instead will depend first and foremost on our being able to afford to spend considerably more money on a policy, but if we are able to do this comfortably, whole life may be worth a look.
One of the distinguishing features of whole life insurance is the whole life part, and you can indeed get coverage over your whole life as the name of the type of policy suggests. We do need to keep in mind though that life insurance becomes very expensive later in life and you can expect to pay a lot if you’re looking to insure your life at more advanced ages, whether you pay for this over time or not.
Whole life insurance consists of two components, the insurance part and the savings part. Savings are accumulated over the years which may be used for various purposes, including helping to pay for the higher premiums that result as we age. Whether or not this is a good use of our resources or not is another matter though and this will depend.
The savings component of whole life insurance is a form of retirement and estate planning, as this takes the extra money that you contribute to the policy beyond what the life insurance would cost alone and allows this extra money to accumulate over time for you.
In essence, whole life is life insurance with a savings account, at least the standard form, so we really need to look at how good a savings account this provides to help us decide whether we want to put our extra money in the policy or invest it elsewhere.
The best way to understand this is to view standard whole life policies as savings vehicles, where the goal is to just keep up with inflation or to at least come close to doing that. There are three main classes of investments, savings, income, and growth, with income being things like bonds and preferred shares, and growth being investing in stocks.
Prior to investing, we need to look to achieve the proper balance for ourselves between these three asset classes, where younger people tend to benefit more from having most or all of their investments in growth, and elderly people will usually be better served with more conservative investments.
The costs of whole life policies can be 10 times higher than term life, so this savings component is not a modest addition to the policy, it’s a big one. The thinking though is that we should be saving anyway so why not save with a life insurance policy.
There are many who recommend against whole life and suggest we invest our money elsewhere, and this may be true in a lot of cases, and we may even want to say that most people who invest in whole life would be better off just going with a term policy.
However, there is a segment of the population that may be so conservative that they may just want to invest in savings vehicles, with their risk tolerance being limited to this, and for these people, standard whole life may be at least a decent option.
They also may have difficulty saving enough and there’s nothing like having your contributions made automatically with failing to do so putting your life insurance policy in jeopardy to motivate you to stay the course where perhaps you may otherwise fail to a meaningful degree.
If one wishes to invest their money for a better return, some whole life policies do allow this, and this serves to get past the criticism that whole life insurance policies do not grow our money very well and one would even be better off in treasuries or certificates of deposit.
For those considering whole life insurance, there are a number of options available. Beyond the standard whole life, we can also select universal life, which has more flexible options. Universal life provides the means to reduce your premium payments by using the savings component of the policy to make up the shortfall, and this can be very useful and even save your policy if you run into economic hardship.
Variable life insurance policies allow us to select more aggressive returns by having our money invested in things like stocks and bonds, the sort of thing that most people would want to invest in given the choice.
The suitability of this depends on the circumstances and if you would normally place your extra money in a savings vehicle, then standard whole life may be for you, but if you would rather be in investments which have the potential to beat the rate of inflation, variable whole life would be far more suitable.
You can also purchase variable universal life, which is a combination of both where you can shoot for higher returns and also reduce the cost of the policy if needed.
Both term and whole life do have their place in certain situations, and we should be taking a good look at which may be best for us and making sure that we are deciding this for ourselves rather than just going with what an insurance advisor may recommend.