Term Life Insurance
Term life insurance is just that. Insurance that is for a specified “term” or length of time. They typically come in terms of 10, 15, 20, 25, or 30 year terms. Here are some key features of term insurance:
The premiums are locked in for the life of the term. They can not go up during the term. Think about paying $50 a month for a term policy. You pay the $50 a month in month one and throughout the life of the term.
At death the policy pays out the face value of the policy. If it is a $500k face value then your spouse gets a check for $500k.
At death the face value is paid out tax free as long as you are paying for your premiums with after tax (your take home pay) dollars (and who doesn’t like tax free so make sure you always pay for these policies with after tax dollars).
This is pure life insurance, in other words, it only protects against your death. Because of this it is the least expensive form of life insurance you can buy (and when I say least expensive it isn’t even close, it beats all of the other cash value policies by a lot). Premiums are not recoverable so at the end of the term you don’t get any of your money back and there is no built in savings account. (Don’t let that scare you!! It makes up for that by being the least expensive form of insurance)
Cash Value aka Permanent Value Insurance
The other types of life insurance are what is known as “Cash” value and/or “Permanent” life insurance. These policies are designed to have a life insurance component (an amount paid to your beneficiary if you die) as well as a savings component that builds up “cash” value over time. There are numerous names for these. Basically if there is a death benefit with a savings account built in then you know you are looking at one of these types of policies. They come in various names, but are commonly called:
- Whole Life Insurance
- Universal Life Insurance
- Variable Life Insurance and sometimes a combination of all or some of these names
How do these policies work? Let’s explore:
Part of your monthly premium payment goes towards the death benefit within the policy and the other part goes into a savings account that earns interest. These interests vary based on the policy, but here are some of the average interest percentages:
- Whole life typically earns between 2.6% – 4%
- Universal typically earns an average 5.4%
- Variable typically earns an average of 7.4% (why is this higher? Because the savings account is tied to investments so they fluctuate with the market. This means some years you will make money and some you will not unless there is a built in minimum interest rate you will earn)
These policies can be very expensive because you are paying for a life insurance and a savings mechanism.
As your cash savings grows you can take out loans against your savings, but this can reduce your death benefit if you die while the loan is outstanding.
If you do die, your beneficiary gets the death benefit and the cash portion oftentimes gets kept by the insurance company unless you purchase expensive riders to ensure your beneficiary gets both (that sucks doesn’t it!!!)
These policies can be much more expensive than a straight level term policy.
Group Term Life Insurance – through your work place
If you are employed then you usually have access to a group term life insurance policy. Some police/fire departments also give their employees one, two, or three times your annual salary in life insurance for free. There are also oftentimes the ability to purchase additional life insurance on top of this. So lets look at group term life insurance.
Your free one, two , or three times your annual salary that is free is just that FREE, so you don’t have to worry about it going up in cost unless they change their policy on it being free of coarse.
For the buy up portion in a group policy you are “grouping” all of the employees together to determine the risk and participating in the policy as a group. This means as you get older your provide more risk to the group so as you age your premiums usually go up. That’s why when you sign up for annual enrollment you see the tables of how much insurance based on your age in there. As long as you stay employed you can keep paying for the policy, but if you leave your employer that group term policy only stays in effect for 31 days after you leave. Once the 31 days is up you no longer have the group term coverage. You can keep the coverage if you “convert” the policy to a whole life policy. What does that mean? Well your premiums are going to go up, significantly because remember cash value insurance is can be very expensive.
Which type is right for you?
I recommend the Term life insurance hands down. Why? Well for starters it is the least expensive by far. For example below are some real quotes I ran in February of 2018 (for time references and these are subject to change) on term vs whole life for a healthy 30 year old male for $500k in insurance:
20 year term approx. $21 monthly /30 year term approx. $33 monthly
Whole life policy approx. $460 monthly
I told you cash value insurance is expensive. That’s a difference of $427 – $439 a month. What can you do with an extra $427 a month? Can you pay down some debt? Invest in retirement? College funding? Pay off the house early, ect,? So why do so many in the insurance world push you to buy cash value insurance? Commissions!!! Insurance agents are compensated based on the premium costs, so the higher the premium you pay the higher their commissions they make. If you had to put food on the table selling life insurance which products would you sell? The one that paid a measly couple of hundred dollars, or the one that paid you several thousand dollars. This is why most insurance agents push the cash value products till they are blue in the face (there are some good insurance agents out there!!!).
They come at you with all kinds of things like:
- Why would you buy a term policy and give all your money to an insurance company with nothing to show for it at the end? (Answer: because it is over 10 times cheaper and you can save, pay down debt, or invest the difference!!)
- A cash value policy is an investment that you can use to save for retirement! Returns within these policies, especially whole life, are historically low and when you die the insurance company KEEPS the cash value unless you pay even more for riders to ensure your beneficiary gets your cash savings (so add some more money to that $460 a month costs).
What I see happen all to often is someone gets sold on one of these cash value polices, but they can’t afford $460 a month so they end up buying a much smaller policy to get their monthly payments down to a more affordable monthly payment (sounds kinda like buying a car huh?). By doing this you just put your family in a potentially really bad predicament should you die. Let’s say $100 a month buys $100k worth of whole life insurance. Is that $100k death benefit even enough to pay off the house? Maybe, but potentially not, so you have just put your surviving spouse into a situation that they no longer have your paycheck coming in but the monthly expenses are still the same, and maybe even higher (they might have to add child care to go back to work). This is not a good situation to be in. They may have to significantly downgrade their lifestyle and even may have to sell the house!
All this to say, you must evaluate what is best for you and your families situation. I personally only have straight term life insurance polices on myself and my wife because the cost was so much cheaper than any other life insurance I could buy. The best part is knowing my family should have adequate insurance to help them maintain the same lifestyle we are living today if one of us passes away
**You can’t always predict what your future financial and family needs may be so always consult with a licensed life insurance agent to fully understand what your life insurance needs may be. The author, and creator of this site is a licensed life insurance agent in the state of Texas~~ another one of those fun disclaimers 🙂
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