Within the two main types, there are sub-types as well.
Which is best for you?
Here’s a general explanation for each different type of life insurance policy we offer, and who is best suited for each type.
Term Life Insurance
90% of our clients purchase term life insurance. Most term life insurance policies provide guaranteed coverage to age 95, with an affordable initial premium for a period of years (the term), such as 10, 20, or 30 years.
It is the most affordable type of life insurance because of the low cost premiums during the initial term. Generally speaking, the shorter the term, the lower the premium, so 10 year term is the cheapest and 30 year term costs the most.
After the initial term, the policy moves to an “annual renewable rate”, which will be determined by the insuring company at the end of the term. I typically see renewal rates at 4 to 8 times the premium during the initial term, so be sure to lock in as long of a term policy as you can afford, because you DO NOT want to pay those renewal rates.
A lot of people never anticipate paying the renewal rates. They may only need coverage for a short period of time, perhaps to cover a loan, a business agreement, or to replace employment income. In this case, term is the perfect solution, since its initial premiums are so low. Why pay whole life pricing if you only need the coverage for a short duration?
Note: Life insurance is not to be confused with Medicare Supplement Plans, which covers gaps in medicare coverage for insureds age 65 and older, as well as drug prescription plans and advantage plans.
Permanent Types of Coverage – Whole Life and Universal Life Insurance
Whole Life Insurance
This policy is designed to cover you for your “whole life”. The premiums are higher than in term or universal life, but that’s because it has superior benefits. It actually builds some very nice cash value, and pays dividends, so the benefits are much better.
Two important benefits of whole life are:
1. Cash value is available for loan or withdraw
2. Dividends can be paid to you in case, used to reduce your premium, or to buy additional insurance, known as “paid up additions”.
Whole life illustrations usually show two columns with for guaranteed cash values and death benefit, as well as “projected” or “assumed” cash value, dividends, and death benefit. The premium is much higher than term or universal life, but you have a lot more benefits with this policy.
Take note that not all whole life policies pay dividends. If they do, they will be illustrated in the “non guaranteed assumptions” column as “Projected Dividends”. They are not guaranteed.
One benefit of the dividends, if available, is you could take them in cash, thereby reducing your total outlay. Or dividends could be taken as cash in your pocket, or for other purposes as I mentioned above.
For more information, see our article on The Cost of Whole Life Insurance.
Universal Life Insurance
This type of policy is similar to whole life, as it may provide coverage for life, but the coverage and premiums are much more flexible. Like whole life, there must be sufficient premiums or cash value to pay the policy costs and keep the universal life policy in force. But since the costs of insurance and rate of interest the cash value may earn are both variable, universal life is usually purchased and premiums are determined by “illustrating” these variables to see how the policy will perform. In other words, we guess. Then every year or two, a new illustration with “current” policy costs and interest rates is usually requested to see how the policy is performing.
The benefit to universal life is you may be able to pay far lower premiums to keep the policy in force for life than in whole life. For example, if you buy a UL policy in times of high interest rates, your cash values may accelerate rapidly, outperforming your original expectations, and allowing you to pay less in premiums in future years. But it can also work in reverse. If the cash values don’t grow as originally expected, you’ll have to pay higher premiums than initially illustrated to keep your coverage in force.
Two popular types of UL’s are Guaranteed UL’s, which I will cover below, and indexed universal life policies.
“Guaranteed” Universal Life Insurance
This type of policy is built on a universal life base, but acts more like a term policy to age 100 or 120.
Most companies offer their UL policies with an optional “No Lapse Guarantee” feature, which essentially cancels out the “adjustable” features of a universal life policy and the need for cash value to sustain the policy. So you may have a no lapse guarantee to age 100 on your policy. In this case, you will pay the minimum premium necessary to keep your policy in force through age 100, and you will probably accumulate little to no cash, but with the “no lapse guarantee”, that’s okay. You don’t need it.
The problem with guaranteed universal life is that since you have no cash value to sustain the policy, you’re in trouble if you miss a premium. With regular universal life, no big deal if you skip a premium, but with guaranteed, you must stay on schedule or your “guarantee” could be in jeopardy.
Variations of Term Life Insurance
Term/Universal Life Hybrids – A few companies have come out with a form of guaranteed universal life with options for very short “no lapse guarantee” riders. The “no lapse guarantee” portion of the policy may only last for a duration such as 10, 20, or 30 years. Just like guaranteed universal life policies do to age 100 or 120, these riders mandate that even if the policy has no cash value, the death benefit and premium are still guaranteed to stay fixed during the initial term selected. After the initial term, the policy reverts back to a plain universal life policy where higher premiums and cash value will be needed to sustain the policy.
Return of Premium Term Life Insurance
These policies charge you an additional premium so that at the end of your term, 100% of all premiums pay (for the base policy as well as the return of premium rider) are paid back to you if death has not occurred.
See our article on Return of Premium life insurance.
“Odd” Term Durations
While almost every company offers 10, 15, 20, and 30 year term, some companies offer other term lengths, but this is not the norm. Some offer 5 year term, but I have yet to find a 5 year term policy any cheaper than my 10 year term options, so I don’t sell them.
American General offers almost any term length you can imagine with their Select-A-Term product line, such as 16 year term, or 24 year term, etc.
Prudential (Pruco Life) has a term policy that offer insurance to age 65, regardless of your age, with the intention of providing coverage through your working career. This can lead to odd term durations. For example, if you’re 38 and purchase their Workforce 65 policy, it is essentially a 27 year term policy.
What’s the Difference? Which one is right for me?
If you only need life insurance for a short period of time such as 10 to 30 years, term is the way to go. If you want coverage in place for the rest of your life at the lowest premium available, you want guaranteed universal life.
If you want the flexibility of paying your premiums when you want, and are okay with constantly monitoring your policy values, then a vanilla universal life may be appropriate for you. And if you want coverage for life with guaranteed cash accumulation, then you should consider whole life insurance.
For more information, please visit our category about Types of Life Insurance or call us at 877-996-9383.