At IBUSA, we are not married to any one type of life insurance and we certainly do not always recommend you “Buy term and invest the difference.”
Why is that, you may ask.
The main reason is, we are not trying to sell you a quick and easy term insurance policy and move on to the next client. Instead, we want to find the best policy for you, based on what you actually need.
Now, that might be a term policy, which is great.
But for some people it might be a permanent policy.
And since we are not a high volume call center trying to write as many policies as we can, we have the time to spend with you to make sure you are getting the best advice possible on what the right life insurance product for you may or may not be.
So with that said, let’s talk a little bit about life insurance.
In the broadest sense…
Life insurance is a contract under which an insurance company promises to pay a death benefit to your named beneficiary if you die.
It’s a simple concept in theory, but, in practice there are different types of life insurance to choose from.
No single life insurance product can claim the mantle of “the best life insurance,” but some policies are undeniably better suited to certain scenarios and objectives.
Term vs Perm
Every life insurance policy falls within one of two general categories: term or permanent.
And within each category, there are multiple variations, based on how the policy is designed, each with its own strengths and weaknesses.
Having a lot of options is a good thing, but to make an informed decision, you’ll need to know how they work.
About Term Life Insurance
Term life insurance is sometimes called “pure life insurance.” That’s not because it’s all-natural or wholesome but because it’s simple and easily understandable.
When you buy a term policy, you pay regular premiums to the insurance company and, if you die, the insurer pays out a death benefit to the policy’s named beneficiary. Note the phrase “if you die” (as opposed to “when you die”).
By definition, term policies have a finite shelf life, i.e. it is going to end. Either it will end when you stop making premium payments, when the term ends, or when you die.
Most term life insurance expires, ironically, when you need it most, that is, when you are old.
Every term policy provides coverage over a defined period (the policy’s “term”), which can range from as short as one year to as long as forty years.
If you reach the end of a policy’s term and you’re still alive and kicking, the coverage lapses and you no longer have life insurance.
Some term policies can be renewed at the policyholder’s option. Basically, if you reach the end of the term, you can elect to renew the coverage for an additional term.
When that happens, the insurance company reevaluates the risk and almost always increases the premium (usually a lot), lowers the death benefit, or both.
However, even “guaranteed renewal” term policies eventually reach a point when renewal is no longer an option, typically age 90 or 95.
Different Term Life Insurance Policies
Term life insurance’s simplicity doesn’t leave too much room for customization, although you can always add different riders for added value.
The primary variables from one term policy to another are the length of the term and whether it can be renewed.
Although not every insurance company offers the same term lengths, 5-year, 10-year, 20-year, 25-year, 30-year, 35-year, and 40-year terms are the most common offerings.
You should choose the term length that corresponds to your needs and goals.
Most term life policies are “level term,” which means the premium payments stay the same for the duration of the policy.
Level term life insurance is ideal because it lets you lock in the same rates for a potentially long time, but you usually have to pay higher individual premiums to get the longer term.
By contrast, “annual renewable term” (“ART”) policies typically have one-year terms, but the policyholder has the right to renew the coverage annually until reaching a certain age. At each renewal, the premium usually goes up. In most cases, you’ll pay more early on for level term coverage than for ART, but after a while, an ART policy’s annual increases raise the payments above a comparable level term policy.
“Decreasing term” life insurance offers a variation on adjustable term coverage. Instead of premiums increasing over time like with adjustable renewable term, premiums stay the same and the coverage level decreases.
Typically, a decreasing term policy provides life insurance coverage for between five and thirty years, with the death benefit decreasing each year. So, if the insured dies early in the term, the policy pays out more than it would pay later in the term.
Decreasing term is useful if you’re fairly certain your life insurance needs will predictably and steadily decrease over time—like if the purpose of the coverage is to make sure your mortgage gets paid off if you die.
Note: typically you can get level term life insurance vs decreasing term for close to the same price, so it makes sense to shop around and compare term life insurance quotes.
A final term life option worth mentioning is what’s called “convertible term life insurance.” Convertible term coverage generally works like other types of term life insurance, but with an important distinction.
Convertible term comes with the option to switch the coverage to permanent insurance (either whole life of universal life).
Usually, you have to exercise the conversion option by a certain age, and some insurers require insureds to be in reasonably good health to make the election.
Convertible term life insurance can be a smart way to obtain relatively cheap, higher-coverage insurance while you need it, and conveniently switch to more versatile permanent coverage later on.
Predictably, the coverage amount will be lower for the permanent life insurance, but it will also have cash value and the other perks of whole or universal life.
Term Life Insurance Pros and Cons
If your primary need for a life insurance policy is to pay out a death benefit in the event of your untimely death—and you want to get as much coverage as possible as cheaply as you can—you might be a good candidate for term life insurance.
You can compare term life insurance rates vs whole life. When you do, you will see that term life is clearly less expensive.
No Cash Value
Term life insurance does not accumulate cash value. The only exception would be return of premium term life insurance, where a small amount of cash is available as the policy ages.
Now, for you, cash value growth may not be as important as maximizing your death benefit.
Just know that there are many people in their 50s, 60s and 70s today, who wish that they had gone with whole life vs term 20-30 years ago for the cash value accumulation they would have today.
A huge benefit of term life insurance is that it allows you to tailor your life insurance to your specific need.
Have a 30 year mortgage, then consider a 30 year term.
Have kids in the house who will depend on your financially for the next 20 years, then consider a 20 year term policy.
You can also add riders, such as an accelerated death benefit or terminal illness rider, that pays out a portion of the death benefit in advance if you are diagnosed terminally ill.
Just remember, term life is temporary.Most policies expire worthless, but not dying is a good thing, so there is that.
But, if you need life insurance long term, as part of a retirement, estate, or business-succession plan—or if you’re looking for more tangible back-end value from your premiums in the form of cash value growth—a term life policy is unlikely to meet your objectives.
About Permanent Life Insurance
Permanent life insurance is a more sophisticated form of life insurance combining a traditional death benefit with a long-term savings or investment component.
Permanent policies like whole life and universal life are designed to remain in place for an insured’s entire life.
And, with whole life in particular, the premiums are fixed, which means your coverage is locked in until you die or cash out the policy, with no risk of premiums increasing as you age.
Cash Surrender Value
The savings and investment component of permanent life insurance comes in the form of cash surrender value that steadily builds up and earns interest.
Over the long term, your cash value will act as a forced savings account, returning a much higher rate of return than a typical savings account at a bank.
Many whole life policies from Mutual Insurance Companies also receive regular dividends from the life insurance company.
A life insurance dividend is a piece of the insurance company’s net profits paid out to policyholders.
Dividends aren’t guaranteed, but some well-established mutual insurance companies pay them like clockwork for over 100 years.
If your policy receives a dividend, you can take it in cash, let the insurer hold it and pay you interest, or invest it back into the policy via paid-up additions—increasing both the policy’s cash value and its death benefit.
Permanent Life Insurance Variations
The two principal types of permanent life insurance are whole life and universal life.
Whole Life vs Universal Life
Whole life has been around longer and is defined by its predictability.
It features fixed premiums and fixed cash-value growth at a guaranteed interest rate.
The idea is that a single policy offers both a death benefit and secure savings with guaranteed returns and no risk of loss.
If you reach retirement and haven’t needed the death benefit, you have a reliably liquid asset ready to contribute to your retirement budget.
Universal life is built around the same basic structure as whole life, but with increased flexibility.
To start, the premiums are elastic—you have some discretion as to how much you pay per month.
There’s a monthly minimum to cover underwriting costs, but you can also apply cash value directly toward premiums.
Of course, the more you opt to pay into a policy, the greater the death benefit, cash value, and growth potential will be.
Universal life also differs from whole life in the way growth is measured.
Rather than fixed-rate returns, you can opt for variable universal life, where growth is based on overall investment performance.
The insurer offers multiple investment “baskets” to choose from, and your returns are measured accordingly.
Indexed Universal Life
Or, indexed universal life lets you tie policy growth to an equity index, like with some mutual funds.
The way it works is that, if the NASDAQ (or whichever other index the policy uses) increases in a given month, the policy value increases proportionally.
In exchange for the insurer agreeing to absorb or minimize losses (the “floor”) when the market goes down, growth is capped at a defined percentage (the “cap”) or shared between the policy and insurance company.
Guaranteed Universal Life
Another variation, guaranteed universal life, is designed for absolute certainty that a death benefit will eventually be paid out.
Policies come with a no lapse guaranty and, unlike other universal life coverage, emphasize the death benefit rather than cash-value appreciation.
Using Cash-Value of Permanent Life Insurance
The cash-value component, and the many ways you can potentially use it, is what gives universal life and whole life their versatility as financial assets.
First, you can just keep a policy in place and be certain that your beneficiary or estate will ultimately receive the death benefit.
If you need cash, you can borrow against cash value at relatively low rates and repay the loan on your own schedule (loan balances are deducted from policy proceeds if not repaid).
Second, if you reach retirement age and no longer need life insurance, you can surrender a policy for its cash value.
Alternatively, you can convert cash value into a tax-advantaged annuity and receive regular payments from the insurer for the rest of your life.
Another good application for retirees is to exercise a “reduced paid-up” option that avoids further premiums in exchange for a reduced death benefit.
“Reduced paid-up” works well if you want to streamline your monthly budget but keep some life insurance for your heirs.
Permanent Life Insurance Pros and Cons
If you’re certain you want insurance proceeds to be available when you die regardless of how long you live, permanent life insurance is probably what you need.
Permanent Death Benefit
Unless you cash out the policy or let it lapse, you can be sure the death benefit will be there.
A guaranteed death benefit is vital if, for instance, you’re providing long-term financial support for a disabled dependent and want to provide for the loved one after death without jeopardizing Medicaid eligibility.
Permanent coverage is also a good source of funding for final expenses. The costs of funerals and burial are much higher than most people realize—sometimes tens of thousands of dollars.
A whole life final expense insurance policy earmarked for final expenses and burial costs ensures you have the final arrangements you want without your surviving family members having to foot the bill.
Because of the permanent nature of the coverage, whole life and universal life are reliable estate-planning tools.
A guaranteed source of estate liquidity avoids any need to sell off other assets to pay creditors, administrative fees, or taxes.
Estate debts can be a major concern if you have non-liquid assets like real estate or heirlooms you want to keep in the family.
Whole life is often used to protect family farms by covering estate and property taxes owed for the real estate.
If you will have an estate large enough to qualify for estate taxes, whole life or universal life can help reduce the amount owed.
Money used for premiums is removed from your future estate, and, if appropriately structured, policy proceeds are not taxable to the beneficiaries or the estate.
For businesses, permanent life insurance can be a fundamental part of a succession plan.
Policy proceeds provide the cash surviving partners or the business entity need to buy out a deceased partner’s ownership interest.
This protects a business by eliminating the risk that an heir with little knowledge of the business inherits managerial control.
If an eventual death benefit isn’t a necessity, the cash value accrued by universal life or whole life insurance becomes a resource for retirement planning.
You get the security of the potential death benefit as long as you need it, but, when you don’t, an asset with fairly high liquidity is there waiting for you.
Policies maintained long-term earn respectable growth, resulting in cash value considerably greater than the aggregate premiums paid.
Critics of universal life and whole life frequently raise two downsides.
First, premiums are notably higher than term life for the same level of coverage. Proponents of permanent coverage respond that, while term life is undeniably cheaper, term policies provide less real value because the vast majority never result in a payout.
You either die during the term and your beneficiaries get a big payout, or you don’t and the premiums are gone. Permanent policies cost more but are certain to pay out in the end—either through the death benefit or cash value.
The second common criticism of whole life in particular is that return rates can’t compete with what you’d likely get in the stock market.
This is true as far as it goes, but whole life insurance doesn’t pretend to be a high-risk / high-reward investment.
Growth is guaranteed at a fixed rate, avoiding market volatility and balancing out riskier investments in a portfolio.
In that regard, whole life is better compared to CDs than stocks (though you don’t get the potential death benefit with a CD).
To an extent, indexed universal life was designed to split the difference. Policyholders can enjoy some of the fruits of surging markets, but the insurer softens the impact of slumps.
Since their introduction, indexed policies have rapidly gained in popularity, attesting to the appeal of the concept.
Choosing a life insurance policy shouldn’t be a daunting proposition. An experienced life insurance professional can help you review all the options and identify the policy best-suited to your situation and financial objectives.
The team at IBUSA is ready to answer all your questions and help you arrive at the best life insurance policy for you, based on your specific needs and goals.
So what are you waiting for? Give us a call today and experience the IBUSA difference.