Your Life Insurance Agency
Life insurance is a type of personal insurance that pays out a sum of money after the death of the insured individual or after a specific period of time. But how do you know if buying life insurance is right for you? First, let’s talk about the different types of life insurance.
Life Insurance: Perm vs. Term
There are two different types of life insurance: term life insurance and permanent life insurance.
Term Life Insurance
Term life insurance is exactly like it sounds. It provides a death benefit at an agreed upon price for a specific term or period. Term life meets an entirely different need than permanent policies. Unlike permanent policies, there’s no cash value component, and premiums will get more expensive over the life of the system. These factors make it very affordable.
Since term life is a policy that we are “renting” for a defined period, it’s typically much less expensive than any permanent policy. This cost difference is what makes term ideal for covering expenses that are highest during our prime working years.
Our financial responsibilities follow a bell curve over our lifetime. When we’re young, there aren’t a lot of people relying on us or assets to cover, but they slowly increase as we get older. Eventually, however, this begins to tick down again. We finish paying off our major physical items, and our dependents eventually become self-supporting.
A term policy is an affordable way to cover those major cost for designated periods of time. The most frequent periods are 10, 20, and 30 years long, but there are an enormous variety of combinations within these like five-year or yearly renewable term. The premium will never increase when it’s within these agreed upon terms.
The Benefits of Term Life Insurance
Lower Price: Many people will purchase term life insurance because it is cheaper than permanent life insurance. If you are looking to get the most bang for your buck, term life is the way to go. The great part about term life insurance is the budgeting aspect. Once your premium is set, it doesn’t change until your policy runs out.
Renewability: If you make your term life insurance payments on time, you are guaranteed to be able to renew your policy. You can even renew without getting a new medical exam. Most policies will guarantee this renewability until age 95.
Ability to Change: As you age, things change. This may mean you need your coverage to change as well. With a term life policy, you are granted flexibility in changing your policy to a certain extent. If you want to decrease the face amount of your coverage, most carriers will allow this after about a year of coverage and on time payments. It’s also great to have a fixed pay period because you can plan for your life and not be stuck in paying for a permanent policy when you don’t necessarily need it.
Less Complicated Than Permanent Life Insurance: Term policies don’t produce cash value and are much less complicated to understand than permanent life insurance. It’s very easy to conceptualize; you are simply paying for coverage for a set amount of time.
Convert Your Term Life to Perm: If at some point during your term life insurance coverage you want to convert your policy to a permanent policy, this is doable. You usually won’t even have to take a medical exam to qualify no matter the standing of your health. The majority of term life insurance policies are convertible up until the age of 70 years old.
Permanent Life Insurance
Permanent insurance is a policy that is guaranteed to be claimed upon because it stays with the insured for their entire lives. A permanent life insurance policy can be thought of as paying a mortgage on a policy you own for when you use it. A permanent life insurance policy will provide you with a death benefit that equals the amount of the policy at a price that is set at the beginning. The price can be both fixed until the person insured is a certain age, or for their entire life.
Since you’re looking at a death benefit and savings component, permanent life premiums will be higher, but along with that you’re getting added features. Perhaps the most important feature of a permanent life policy is the ability take a loan from yourself. Interest rates are much lower than the market typically dictates, and you can get the money hassle free because it is in essence yours. In the case of a default, the insurance company can cover the loan cost with the remaining cash value.
Another item to consider is premium payment. While paying premiums may be front of mind while we are young and actively supporting dependents, we may lose track of much of that later in life. If for some reason you weren’t able to pay your premiums, they will just subtract from your cash value, which ultimately prevents your policy from ever lapsing.
It comes with the additional feature of an accumulating cash value in addition to the death benefit. This value adds an extra layer of protection and investment onto your policy. It is one of the biggest determinants of how your permanent life policy is set up, and there are two main categories: whole life and universal life.
- Whole Life: Locks in premium at issue age and guarantees cash accumulation
- Universal Life: Flexible premium/death benefits and variable cash accumulation
Whole Life Insurance Specifics
It works somewhat similar to a Universal system, and roughly speaking tends to be more conservative with less variability once the plan is set up. Just like Universal, there’s cash component that grows in addition to your death benefit. The major difference is that this return is guaranteed! You still have the same options to borrow against yourself for loans or if premiums lapse.
Whole life is part of long-term life planning goals, and it’s important that once you buy a policy, you never let it go. The younger you are the less the policy cost, and though it may seem initially expensive, the upfront investment makes a lot of sense when you’re looking at a long-term financial plan.
Universal Life Insurance Specifics
Universal life insurance is a type of permanent life insurance so you can expect it to provide coverage for your lifetime. Universal life provides a flexible premium and face amount, which can make is less expensive than whole life insurance.
Although it does create a cash value, the cash value is not guaranteed or set in stone. The cash value is typically credited every month with interest. The policy is also debited every month by the cost of insurance charge even if you miss your premium payment. The interest credited has a minimum rate usually around 2% and is created by the insurer.
How Much Life Coverage Do You Need?
Coverage needs change continuously throughout your life. At the very minimum, your life policy needs to cover funeral costs and other unexpected spending associated with that. Think $8,000-10,000 here. This price applies to everyone but is most relevant to individuals who are 18 years or younger with no dependents, income, or assets, as they’re most likely to leave someone they care about with the bill.
As you get older, you begin to take on more assets and expenses. Think of the obvious stuff: cars, mortgage, children. As we get older, we become responsible for more people and things in our lives that need to be considered.
We also like to make recommendations based on a times salary consideration. If you make $30,000 annually, a $90,000 insurance policy will give your family about three years to adjust. You’ll see in the next example, that $90,000 won’t go as far as you think.
Average Car Value – $16,800
Average Home Value – $196,500
Average Cost of Raising One Child – $233,610
This simple example illustrates how quickly these costs add up, and I’m sure we’re all aware that these are just the bare-bones of everything we pay for. On top of this, we have utilities, insurance, recreational cost, food, etc. to name just a few!
To keep track of changing expenses, we recommend evaluating your coverage anytime you have a life changing event. Some typical examples:
- Birth of a child or grandchild
- Family member requires long term care
- Financially support or manually care for a parent
- Funding a child or grandchild’s education
- Large estate
- Marital status change: newly married or divorced
- Medical issues for yourself or your spouse
- New home
- Retirement income
- Started a new company
- Other unexpected future events
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Give Tatum Insurance LLC a call today!