Everyone has an opinion about life insurance. Do I need coverage and if so, how much? What’s the difference between term and whole life? And the list goes on…
Let’s discuss term coverage first as it fits most people’s needs for large amounts of insurance. The purpose of term insurance is to protect the beneficiary against a premature death of the insured for a specific number of years, usually between 10 and 30 years in five-year increments. Because term insurance is designed to cover you for a limited period, it is much less costly than permanent coverage which is designed to last for your lifetime. Another use of term insurance is to protect a borrower from loan default should the payor die unexpectedly.
A typical example is the young family that has the expenses of bring up children, buying a house, schooling and many other costs associated with a growing household. Most young people are healthy and have a life expectancy which makes it inexpensive to buy coverage. Most consumers will look for the lowest cost because they are not aware of important factors that should be taken into consideration including quality of the company, maximum conversion age and type of policy that can be used for conversion. Many life insurance carriers will allow you to convert from term to a permanent policy without evidence of insurability.
Here’s an example. Let’s say you own a term policy with level premiums for 30 years. At some point during this time you are diagnosed with a serious health issue that would normally result in high premiums or even a decline of coverage. With good conversion options, you will be able to convert part or all your term policy into a permanent policy without evidence of insurability. Not every company has good conversion options. This is a most important feature and the least understood benefit of term life insurance. You will not find this information on the typical website, nor will you find it on the quote forms that are generally provided by these sites.
Before you by any term life insurance, make sure to speak with an independent agent (someone with access to many carriers) and ask about the specific conversion of the recommended coverage. High quality carriers do not necessarily charge more or have stricter underwriting requirements.
Other insurance types fall into the permanent category.
This coverage is designed to stay in force for the lifetime of the insured, and includes whole life and universal life policies. Today, most whole life policies are for small amounts of coverage. Sometimes called “final expense” insurance, they are designed for easy acceptance and generally cover individuals for $25,000 or less.
For amounts over $25,000, a universal life policy with lifetime level premiums is the least expensive permanent coverage. Unlike whole life, this type of universal insurance is intended to pay the death benefit only. Because it does not generate any meaningful cash value, premiums are lower than whole life. A side benefit is the ease in which policies may be compared because all premiums are level and guaranteed.
Whatever type and amount of coverage makes sense for you, don’t be shy about asking questions of your agent. Good agents are a valuable resource that can help you understand your need and address the best way of meeting your requirements.