Which type of life insurance is right for you?
Let’s dive into the different types of life insurance and what they can do for you. By the end, you will be much better able to answer that question.
Just like any other purchase, there is no one size fits all for every person. Some people love APPLE, Some love Samsung? They might both be wrong for you? A contractor might prefer something a little less delicate? Sure they are fast and have beautiful displays but when you mix that with the rugged world of construction it can end in a lot of money down the drain quickly.
Life Insurance is not that much different really. Some policies have every bell and whistle and can do so much in the right hands. But the average consumer won’t ever use even a small number of those features. We hear from people every week that wish they had understood their policy much sooner. And it goes both ways. People that are retiring and find out their policy quits when they do, or people that were “sold” a fancy plan they never really needed, and they just can’t stomach the costs any longer.
The Most Common Types of Life Insurance Policies
- Term Life
- No Exam Life
- Group Life
- Whole Life
- Universal Life
- Indexed Life
- Variable Life
- Accidental Death
- Final Expense (burial) Life
- Guaranteed Issue Life
- Survivorship Life
There are some other obscure policies out there but these by far make up the vast majority. Now we will break them down 1 by 1 and why they may or may not be the right fit for YOU. That is all that really matters anyway right?
Probably the most well known and promoted type of life insurance of all is Term Life Insurance. This is the best bang for the buck out there. You can get massive coverage amounts for very little in comparison.
Term Life is great for those large needs. Think of things like your mortgage, car loans, student loans, credit cards, etc. How would your loved ones make those payments if your income were to be gone tomorrow? It is no secret that many families struggle with this when things are going well, let alone during a tragic time of losing a loved one. Many let this get in the way of starting a plan. They just can’t afford it. That is probably the time you need it the most!
This type of policy has very little “moving parts”. You have the coverage (face) amount, term length, and sometimes some other extra features. That is about it. How much and for how long? Many companies offer a range from 10 years to 40-year policies now. The rule of thumb is your policy can not end past age 85.
That brings us to an important reason that Term is so cheap. Life expectancy is mid 80’s for a healthy individual. It was no accident that they don’t let term go past that. Roughly 1% of these policies actually pay out a claim! With so many people paying in and so few claims it keeps this coverage affordable. I know what you are thinking, why even bother if so few policies payout? Well, none of us have a crystal ball. I would rather spend 1% of my income to protect my family for the other 99% than take that chance.
Many of these policies will have a level premium and level benefit for the duration of the contract. Some will let you keep the policy once it expires for an increase in cost. Let me tell you that increase can be substantial. I have had clients contact me whos rates were jumping 5-11x what they paid all those level premium years. A select few are now offering plans that decrease the coverage rather than increase the cost. We find a lot of clients really like this option, especially having been through it already.
Riders (add ons) can often be packaged into term coverage and can add even more value and bang for your buck.
The majority of companies allow you to convert (trade in) your term policy for another permanent policy. This can be a huge benefit. As it helps to protect you from the biggest drawback to term insurance, it EXPIRES. Conversion allows you to switch into another type of life insurance policy with the same company without having to go through all those hoops again. So if you have a health change you can still lock in a more lasting plan.
No Exam Life
Non-med, no exam, no labs, etc. Not to be confused with the guaranteed issue or accidental death that we cover later.
No exam life insurance is full-blown life insurance that covers all the same things that a regular policy would cover. It can be a term or permanent plan. The only real difference is in the process to qualify for it. Life insurance companies usually want to know everything they possibly can about you before offering you a policy. For some people, the thought of being stuck with a needle and peeing in a cup is just too invasive and they refuse to get coverage.
That is where these plans come in. Instead of all those things the company relies on your Rx history and driving record. Now they are getting info from consumer profile vendors as well. This gives them a picture of what type of risk you might be. If they find something that is a concern in those reports often they will still want to order records from your primary doctor or any specialist you have seen in the past.
These can be a great tool for someone that is terrified of the process or just too busy to go through the medical exam. This will usually come with one big drawback. Cost. These plans typically have a higher cost and many don’t have a preferred rate available on these plans. So if you are in good health and will pass the exams you could be paying extra.
Group life is more of a classification than a policy type. There can be several of the other “types” offered on a group basis. But for the purpose of this post lets treat it as a type of coverage.
It is important to point out the pros and cons and how they can impact the choice you make when getting life insurance for yourself.
There are many employers that offer some life insurance coverage to their employers. This can be term or one of the permanent plans but it is offered to the employes as a whole. That is where “group” comes from. The insurance company is taking on the risk of the entire group good or bad (the bigger the group the better to the insurer).
It is not uncommon to have one time your salary provided by your employer at no cost to you. A lot of plans allow you to elect additional coverage for very little cost to you. You can choose a multiple of your pay up to a limit set by the life insurance company $250,000 is pretty common. These plans can waive underwriting or require underwriting, every plan is set by the employer.
Of course, you should take what you can get when it is provided as a benefit. But is that enough? If you make $50k and can only get 2x salary you probably have a big gap in your coverage? The other big drawback here is that when you leave that employer that coverage will leave too. There are some plans that have the ability to take it with you but it will cost you. The rate you are used to is the group rate and many of the portable plans have to be converted to permanent coverage at a cost of many times the current rate.
We suggest having your primary coverage outside your employer for this reason. Trust me the last thing you want to worry about when you are laid off, retire, or quit is your life insurance. Yet we get dozens of calls from people that are retiring and had no idea the life insurance plan was going to retire with them. Not very many of us are in the same shape in our 60s as we were when we started our career. Not to mention that life insurance rates are heavily influenced by age even if you are in perfect health.
WL is the polar opposite of term. Whole life is designed to be with you for the rest of your life. That could be any number of years. Originally called endowment contracts they used to be set up to have a cash value equal to the policy amount at age 100. So if you lived to 100 your policy would pay out as an endowment.
Nowadays folks like Dave Ramsey and Suze Orman would have you believe that this is the worst thing anyone could ever consider. But is it really that bad? Surely there are times that something like this can be a good fit?
The biggest reason the financial gurus hate WL is that many agents and companies over the years have claimed that it was a good investment. Life Insurance is not meant to be an investment. So in that sense, they are correct don’t buy WL because you want to have $$$ to blow some day. But as part of a bigger picture WL can be a very useful piece of the puzzle. Several whole life companies actually pay dividends on the wl policies they offer. The dividends can be used to grow your cash value and your face amount. These dividends are never guaranteed so they should not be the basis of selecting a plan.
WL has some tax advantages vs other common products. You can also borrow your cash value should the need arise. Imagine not having to go to the bank to be approved for a loan when an emergency pops up. You can pay it back and restore the policy value. If you were to pass away with the loan outstanding it would just decrease the payout to the beneficiary. Some companies even credit dividends to your cash value while you have the money loaned out. Can you imagine your bank paying you interest on money that used to be in your account?
These are certainly not for everyone and need a lot more planning to set up correctly but they can be a great tool for an overall financial plan, sadly many advisors get more caught up in growing their assets under management than building a solid foundational plan. With a slow and steady growth rate in the 3-5% range, it can be a great alternative to bonds or other conservative options. With the added benefit of death benefit protection.
If you think you are a good candidate for a WL policy please give us a call and we can walk you through all the pros and cons in detail. It is very difficult to get accurate WL quotes online as there are so many variables that we just can’t account for in a quote engine.
Universal Life (UL)
Yes, the one that every carrier was sued for in the ’80s. It is still around, but it has been much improved as a result of all those problems.
There are several types of Universal Life but they all share the same basic mechanics. I will dig deeper into that in another post. UL was created to compete with the banks back when you could get double-digit interest on CD’s remember those days??? Me either. Permanent life insurance had been a safe place to build modest savings for 100 years or more. Whole life had been a slow and steady place to earn dividends and have the death benefit protection as well for a very long time. In the ’70s banks were paying 10%+ and people looked at those 3% returns in the whole life as a missed opportunity. People took the cash value from their policies and put in the bank looking for better growth.
The life insurance companies had to find a way to compete for that money back. In with universal life. Instead of the cash value being tied to a schedule it was exposed to an interest rate. It was a competitive rate to what the banks were offering. It was great with this new way of calculating things people could afford much more coverage and enjoy great growth at the same time. UL was a huge hit and every company came out with a version of their own. Things were great!!! Until they weren’t. Interest rates tanked, and not very many companies or agents had the foresight to make adjustments to the policies they had sold.
That is another key to UL they are also called “Flexible Premium Adjustable Life”. This can be a great benefit if you monitor and use it correctly. Very few people do. And with agent turnover almost 100% these policies don’t get the attention they need to really work properly.
Flexible premium means that you can pay as much or as little as you want (within tax guidelines). Pay $100/month to start out and hit a rough patch 2 years later you can pay less or even nothing as long as there is enough cash value in the policy to cover your cost of insurance. As you can guess this was both abused and misrepresented a great deal leading to even more trouble for UL.
The current version of UL has addressed those concerns. GUL guaranteed universal life is among the most common ways to build these plans. They have a minimum premium to guarantee that the policy will not lapse. So even if interest rates rise and fall your policy won’t be in danger. These are very good for a senior in good health that wants a more permanent option and can pass the underwriting. It is not uncommon for us to get twice face amount vs final expense.
These policies can be designed to offer protection anywhere from age 85-121.
Among the newest life insurance types is the Indexed Universal Life. It shares the mechanics of the UL that we discussed above with some potentially powerful upgrades. This comes at the expense of being one of the highest maintenance policies out there. You will need a competent agent and be dedicated to reviewing policy performance on a regular basis. It is not a set it and forget it endeavor.
Indexed life has the potential to accumulate a cash value similar to WL and UL. The major difference here is that the cash value is tied to an “index” most commonly the S&P 500. So when the S&P is doing well the policy cash value will mirror the performance. It is not a 100% match to the index but these policies can perform very well when set up correctly. The trade-off for not being a 100% match on the upside is that there is no downside risk in the index. Let me explain if you put $2000 into your IRA and the investment had a gain of 10% you would benefit from the entire gain as the investor. On the flipside, if it lost 10% your value would be less than when you started you participated in the loss as an investor as well. In an IUL you are not a direct investor so the company shields you from losses. In that good year of 10% growth, you may only get 8%. But on the loss year, you would get a zero. So rather than being down 10%, you would just not get any gain that year. You would still have your $2000 value. These gains have lock-in periods as well so if you have a great gain it can be locked in. And future interest is based on that new account value.
The other major difference is access to the cash value. These policies offer loans like WL, but they also offer options that can sometimes be more flexible and favorable to access the cash value. One such option is partial surrender. Rather than loaning yourself money you can take the amount you need and then forfeit that amount of face amount rather than pay the loan back with interest. This can cause adverse performance so it would need to be carefully considered with your agent.
With some carriers offering the possibility of double-digit returns and no downside risk these have made a big splash in the insurance world. Many agents want to jump on the bandwagon and many carriers as well. It is crucial that you work with an agent with experience in these plans and a company that has favorable terms. There are a few very good providers for these and a lot of plans that just aren’t worth the time. We can walk you through it step by step.
VUL is very much like the UL and IUL that we have previously talked about. The primary difference here is that you are participating directly in the underlying investment. These policies offer mutual funds inside of the life insurance framework. This allows you to take full advantage of the up years but also offers no protection from the down years either.
Variable Universal Life is regulated as both an insurance product and an investment product. Agents that work with these plans must be licensed for both appropriately. These agents are known as registered representatives to indicate they have registered with FINRA.
Also known as AD&D for accidental death and dismemberment, an accident plan is coverage that will only pay out the benefit for a death resulting from an accident. Death from natural causes or illness related deaths wouldn’t be covered on these plans.
AD&D plans can be less costly than full coverage options since they don’t offer blanket coverage for any death.
Most of these plans don’t ask any health questions since they don’t cover that. It can be a way to get coverage when you have been denied for other life insurance.
A lot of these plans have a return of premium provision where they return the premium at age 65 and the coverage is no longer valid. This is to mirror the common retirement age and offers coverage for the working years.
Final Expense Life
FE or burial life insurance is a type of whole life. It is intended to be around for the rest of your life to help loved ones with the “final expenses” left behind. As we approach our final days the last thing we want to do is burden others. The average funeral is $7,500-$10,000. This can double quickly if you loved ones decide to include any add on services once they start planning the ceremony.
That is just one aspect and often times there are significant health events that lead up to our passing. This can leave other bills that add up quickly. Other things such as taxes and fees associated with settling probate are expected to be paid quickly, final expense insurance can provide cash for those needs to avoid having to sell off assets at a discount to get that money quickly.
Many final expense plans don’t require a physical exam and can be approved very quickly. Some carriers even have instant decision programs. It is pretty common for us to assist children of seniors with these plans as well. Both financially and with the process in general. Most carriers allow a child to be the owner and or payor for a policy.
Guaranteed Issue Life
GI is typically a type of final expense life. Unfortunately, we don’t all get our affairs in order when we are young and healthy. Others are even born with conditions that present a challenge qualifying for life insurance.
Guaranteed Issue plans are exactly what they sound like. You can not be turned down due to poor health. They approve everyone and don’t even ask medical questions. The downside is that to protect the company the full benefit is not paid out the first couple of years. So if someone passed away 6 months in the beneficiary would receive the premiums paid + interest as the benefit. After 2 years it would be the full face amount.
But for someone that has significant health challenges, this can be a good alternative to no coverage at all. Even if that money was put in the bank it would not get the near the interest the company pays. It is often 10% or more.
Typically you will see a celebrity like Alex Trebec promoting these on T.V. Those are some of the most expensive plans. Always shop around there are more affordable options out there.
Commonly referred to as a second-to-die policy. A Survivor policy is the first plan we have talked about that is actually tied to two people instead of one.
This is unique because the other policy types had the insured and the beneficiary this plan has 2 insureds. The death benefit is not paid out until the death of the last insured. This is mostly used for estate planning purposes.
For example, a husband and wife have assets they wish to pass on. Rather than be beneficiaries to one another the policy pays out when the second one passes. This provides for either tax consequences or other considerations in the estate plan.