There are two types of policies, but it’s more accurate to think of them as temporary or permanent. It’s kind of like renting an apartment vs. buying a home. When you rent, it’s probably going to be temporary, depending on your situation. However when you buy a house, the feeling is more like you’re settling down and you’ll be there for the long-haul. When you rent, you don’t build value. But when you buy, you can build more equity in your home the longer you own it.
Permanent life insurance can build a cash value, something a term policy can’t do. A term life policy only has monetary value when it pays a death benefit in a covered claim. Temporary and permanent policies also have some types of their own.
For example, term life insurance can include living benefits or critical illness coverage, as well as group term life insurance and key person life insurance, which is sometimes used in businesses. These are all designed to be temporary coverage. Here’s why. The policy might guarantee premiums for 10 years – or as long as 30 years – but after its term has expired, a term policy can become price-prohibitive. For this reason the coverage is, for all practical purposes, considered temporary.
Permanent Life Insurance: Designed to Last a Lifetime
As its name suggests, permanent life insurance is built to last. It’s a common perception that permanent life insurance and whole life insurance are synonymous, but whole life insurance is just one type of permanent life insurance.
At first glance, a permanent life insurance policy can seem more expensive than a term policy, but you’d have to consider the big picture to be fair in comparing the two options. Over the course of a full lifetime, permanent life insurance can be less costly – in part – because term policies become expensive if you require coverage after the initial term has expired. An investment element also helps to build cash value in a permanent life insurance policy, taking pressure off premiums to provide coverage.
If I’ve left you scratching your head over your options, no worries! Understanding the benefits of each type is important, and choosing which policy is best for you is a uniquely personal experience. Contact me, and we’ll review your options to find the right strategy for you and your family.
You may not have thought much about that type of insurance before, or even knew it existed. But joint policies, especially survivorship policies, are important to consider because they can provide for heirs, settle estates, and pay for final expenses after both spouses have passed.
Most joint life insurance policies are what’s known as “first to die” policies. As the unambiguous nickname suggests, a first to die policy is designed to provide for the remaining spouse after the first passes.
A joint life insurance policy is a time-tested way of providing for a remaining spouse. But without careful planning, a typical joint life policy might leave a burden for surviving children or other family members.
A survivorship life insurance policy works differently than a first to die policy. Also called a “last to die” policy, a survivorship policy provides a death benefit only when both insured spouses have passed. A survivorship policy doesn’t pay a death benefit to either spouse but rather to a separate named beneficiary.
You’ll find survivorship life insurance referred to as:
Survivorship life insurance policies are sometimes referred to by different names, but the structure is the same in that the policy only pays a benefit after both people insured by the policy have died.
Reasons to Buy Survivorship Life Insurance. We all have our reasons for buying a life insurance policy, and often have someone in mind who we want to protect and provide for. Those reasons often dictate the best type of policy – or the best combination of policies – that can meet our goals.
A survivorship policy is well-suited to any of the following considerations, perhaps in combination with other policies:
It’s also most common for a survivorship life insurance policy to be a permanent life insurance policy. This is because the reasons for using a survivorship policy, including transfer of wealth, are usually better served by a permanent life policy than by a term insurance policy. (A term life insurance policy is only in force for a limited time and doesn’t build any cash value.)
Benefits of Survivorship Life Insurance
The good news is that life insurance rates are more affordable now than in the past. That’s great! But keep in mind, your life insurance policy – of any type – will probably cost less now than if you wait for another birthday to pass for either spouse insured by the policy.
World Financial Group, Inc., its affiliated companies and its independent associates do not offer tax and legal advice. Please consult with your personal tax and/or legal professional for further guidance.
Words and ideas seem designed to confuse and trick you. But you might be surprised by how simple the concepts and terms actually are once they’re explained.
Consider this article your personal life insurance phrasebook to help you cut through the lingo and better understand the products you’re exploring. Let’s start with the basics!
- Policy and Policy Holder. A life insurance policy is a contract between you and an insurer stating that they will pay out a certain amount of money upon your passing (or another event specified in the policy). The policyholder is the person who owns and controls the policy.
- Death Benefit. The money that gets paid out from the policy when you die.
- Beneficiary. You, as the policyholder, get to decide where the death benefit will go. The people who receive the money are called beneficiaries. That could be a spouse, child, or anyone who depends on your income.
- Premium. The payment you give the insurer in exchange for the life insurance policy is called the premium. You might have to pay these monthly or annually.
- Term Life Insurance. Some life insurance covers you for a specific amount of time. Your beneficiaries only receive the death benefit if you pass away during that time frame. This is referred to as Term Life Insurance. It’s typically considered the most straightforward form of life insurance available.
- Permanent Life Insurance. Another type of life insurance lasts for your entire life. This is called Permanent Life Insurance. There are multiple subcategories of permanent life insurance.
- Cash Value. Some permanent life insurance options come with a savings component. This is called a Cash Value. You can usually borrow against the cash value and spend the money on whatever you please!
This isn’t an exhaustive list of life insurance words and phrases, but it should be the minimum to get you started. Consider reaching out to a financial advisor to act as your translator as you dive deeper into the language of life insurance!
Many people have someone in mind before they purchase their policy. This person or entity can be named as your beneficiary. Naming your life insurance beneficiary helps to ensure that the party you choose gets the proceeds of your life insurance policy, even if your will leaves your estate to someone else. If you’ve decided that you want to provide for a special person or organization through your life insurance policy, it’s important that the beneficiary section will do what you expect.
Here are some simple tips that can help point you in the right direction:
Choosing Your Life Insurance Beneficiary
Who you name as your beneficiary is a deeply personal decision, and there’s no right or wrong answer. Here are some areas to consider:
Note: Contrary to popular belief, you can’t name a pet as your beneficiary — but you can name someone you’d trust to care for your pet. (Sorry, Fluffy.)
Multiple Beneficiaries and Contingent Beneficiaries
You can name multiple beneficiaries for your life insurance policy, but when doing this, it’s better to use percentages rather than fixed dollar amounts. For permanent life insurance policies, like whole life insurance and universal life insurance, the death benefit payout amount can change over time, making percentages a better strategy for multiple beneficiaries.
You can also name contingent beneficiaries. Think of a contingent beneficiary as a back-up beneficiary. In the event that your primary beneficiary passes before you do (or at the same time), the proceeds of your policy would then go to the contingent beneficiary.
Avoid using general designations, such as “spouse” or “children” as your beneficiary. Spouses can change, as divorce statistics remind us, and you never know which long-lost “children” might appear if there’s a chance of a payday from your life insurance policy. In the very best case, general designations will cause delays in payment to your intended beneficiaries.
Choosing a life insurance beneficiary isn’t necessarily complicated, but there’s some room for error in certain situations. While the decision is always yours to make, it’s best to discuss your options with your financial professional to help make sure the settlement goes smoothly and your wishes are honored.
In fact, most people throughout history have had zero outside financial protection in case of an untimely death. So why did life insurance appear? Let’s start by defining what it is.
What is life insurance? <br> Life insurance is essentially an agreement where people pay a company a premium on a policy that will provide a financial benefit in the case of an untimely death (or if other circumstances occur that are defined in the policy). Let’s say you have a spouse and a few kids. You know that if something were to happen to you it would leave them in a serious financial bind; being down an income could mean moving to a worse neighborhood, serious lifestyle changes, debt, and so on. An appropriate life insurance benefit Life insurance is worth considering if anyone in your life depends on you financially.
Roman soldiers: pioneers of life insurance <br> So where did the idea of life insurance come from? The first known example of life insurance was in a powerful organization with a high turnover rate: the Roman Army. Burials were culturally significant to Romans but expensive, which was bad news for poor soldiers constantly waging wars across ancient Europe. In response, they started burial clubs. Members of these clubs would cover funeral costs for their fallen comrades. It wasn’t much compared to the complexity of modern life insurance, but it at least provided a basic honor to soldiers and their families in the case of a tragic death.
Coffee Houses and Churches Not much is known about insurance in general after the fall of the Roman Empire. However, another high-risk field sparked its rebirth during Europe’s colonial era in the late 1680s. Merchants, sea captains, and sailors all worked high risk jobs; pirates, storms, and disease were serious threats to shipments and crews. What we think of as insurance was born to protect the pockets of investors in the case of a maritime catastrophe.
The first life insurance company opened in London just a few years later in 1706. The Amicable Society for a Perpetual Assurance Office was founded by William Talbot and required members to pay an annual fee. In 1759, American Presbyterian ministers created an organization to protect families of deceased pastors, with the Episcopalians following suit a few years later.
Something like modern life insurance was beginning to appear. But the next two centuries saw massive economic and social changes that permanently affected the insurance industry. We’ll explore those in part II!
It sometimes feels like an endless jumble of big words and cryptic abbreviations. Add on top of that how stressful talking about the loss of a loved one can be and you’ve got a topic that can seem unapproachable.
It just so happens to be incredibly important.
Life insurance is an essential line of defense for your family in the case of tragedy. It can give them the time and resources they need to grieve and make a plan for the future. But where should you begin? Here’s a quick guide to weighing and understanding your life insurance options.
Term Life Insurance This option provides coverage for a specified term or period of time (10, 20 to 30 years). It’s just pure life insurance and typically your premiums are lower the younger you are.
Universal Life Insurance (ULI) Universal life insurance is a relatively new insurance product that combines permanent insurance coverage with additional features. If the (ULI) is funded sufficiently, it may provide coverage for the duration of your life and depending on how you’ve structured your policy, there can potentially be a cash value. Keep in mind that if you decide to take out loans or withdrawals there may be fees associated with it.* Be sure to meet with an agent to discuss the specifics of a ULI policy.
Whole Life Insurance These policies include a standard death benefit coverage, and with cash value guaranteed on all premiums paid during an insured’s lifetime.** Critical illness riders may also be offered as part of a whole life insurance policy.
Finding the right life insurance policy can be difficult. Call me, and we can review your options to find Whole Life Insurance that’s a perfect fit for you and your family!
Loans, withdrawals, and death benefit accelerations will reduce the policy value and the death benefit and may increase lapse risk. Policy loans are tax-free provided the policy remains in force. If the policy is surrendered or lapses, the amount of the policy loan will be considered a distribution from the policy and will be taxable to the extent that such loan plus other distributions at that time exceed the policy basis. * Any guarantees associated with a life insurance policy are subject to the claims paying ability of the issuing insurance company.
Even more daunting can be figuring out what policy is best for you. Let’s break down the differences between a couple of the more common life insurance policies, so you can focus on an even more daunting task – what your family’s going to have for dinner tonight!
Term Life Insurance. A Term life insurance policy covers an individual for a specific period of time – the most common term lengths being 10, 20, or 30 years. The main advantage of this type of policy is that it generally can cost the consumer less than a permanent insurance policy, because it might be shorter than a permanent policy.
There’s a small downside to term policies, and it’s found right in the name: term policy. This kind of life insurance policy does have an expiration date. While you may have the option to convert to a whole or permanent life insurance policy through a conversion rider or you may choose to extend your policy, you may find yourself needing to go through the underwriting process again. Life insurance premiums tend to rise the older you get, so the term policy premium you paid when you first got your policy at, say, 30 years old has the potential to be very different from the ones you’d pay at 50 or 60 years old.
The goal of a term policy is to pay the lowest premiums possible, because by the time the term expires, your family will no longer need the insurance. The primary thing to keep in mind is to choose a term length that covers the years you plan to work prior to retirement. This way, your family members (or beneficiaries) would be taken care of financially if something were to happen to you.
If this doesn’t sound like the right kind of policy for you, there’s another option…
Permanent Life Insurance. Contrary to term life insurance, permanent life insurance provides lifelong coverage, as long as you pay your premiums. And contrary to term life insurance, permanent life insurance can be more complex because of its many parts and therefore harder to understand and know what choices are right for you. This insurance policy – which also can be known as “universal” or “whole” – provides coverage for ongoing needs such as caring for family members, a spouse that needs coverage after retirement, or paying off any debts of the deceased.
Another great benefit a perm policy offers is cash accumulation. As premiums are paid over time, the money is allocated to an investment account from which the individual can borrow or withdraw the funds for emergencies, illness, retirement, or other unexpected needs. Because this policy provides lifelong coverage and access to cash in emergencies, most permanent policies are more expensive than term policies.
There are some key things to keep in mind if you’re considering a Cash Value Life Insurance Policy: It is important to remember that loans and withdrawals will reduce the policy value and death benefit dollar for dollar. Additionally, withdrawals are subject to partial surrender charges if they occur during a surrender charge period. Loans are made at interest. Loans may also result in the need to add additional premiums into the policy to avoid a lapse of the policy. In the event that the policy lapses, all policy surrenders and loans are considered distributions and, to the extent that the distributions exceed the premiums paid (cost basis), they are subject to taxation as ordinary income. Lastly, all references to loans assume that the contract remains in force, qualifies as life insurance and is not a modified endowment contract (MEC). Loans from a MEC will generally be taxable and, if taken prior to age 59½, may be subject to a 10% tax penalty.
And don’t worry too much about the hard to understand parts. A financial professional can give you an idea of what a well-tailored permanent life insurance policy may look like for you and your unique situation.
How Much Does the Average Consumer Need? Unless you have millions of dollars in assets and make over $250,000 a year, most of your insurance coverage needs may be met through a simple term policy. However, if you have a child that needs ongoing care due to illness or disability, if you need coverage for your retirement, or if you anticipate needing to cover emergency expenses, it may be in your best interest to purchase a permanent life insurance policy.
No matter where you are in life, you should consider purchasing some life insurance coverage. Many employers will actually offer this policy as part of their benefits package. If you are lucky enough to work for an employer who does this, take advantage of it, but be sure to examine the policy closely to make sure you’re getting the right amount of coverage. If you don’t work for a company that offers life insurance, don’t worry, you still may be able to get great coverage at a relatively inexpensive rate. Just make sure to do your research, consider your options, and make an informed decision for you and your family.
Now, what’s it going to be? Order a pizza or make breakfast for dinner? Choices, choices…
That describes 61.9% of U.S. families as of 2017.¹ If that describes your family (and the odds are good), do you have a strategy in place to cover your financial obligations with just one income if you or your spouse were to unexpectedly pass away?
Wow. That’s a real conversation-opener, isn’t it? It’s not easy to think about what might happen if one income suddenly disappeared. (It might seem like more fun to have a root canal than to think about that.) But having the right coverage “just in case” is worth considering. It’ll give you some reassurance and let you get back to the fun stuff… like not thinking about having a root canal.
If you’re interested in finding out more about Term insurance and how it may help with your family’s financial obligations, read on…
Some Basics about Term Insurance
Many of life’s financial commitments have a set end date. Mortgages are 15 to 30 years. Kids grow up and (eventually) start providing for themselves. Term life insurance may be a great option since you can choose a coverage length that lines up with the length of your ongoing financial commitments. Ideally, the term of the policy will end around the same time those large financial obligations are paid off. Term policies also may be a good choice because in many cases, they may be the most economical solution for getting the protection a family needs.
As great as term policies can be, here are a couple of things to keep in mind: a term policy won’t help cover financial commitments if you or your spouse simply lose your job. And term policies have a set (level) premium during the length of the initial period. Generally, term policies can be continued after the term expires, but at a much higher rate.
The following are some situations where a Term policy may help.
Pay Final Expenses
Funeral and burial costs can be upwards of $10,000.² However, many families might not have that amount handy in available cash. Covering basic final expenses can be a real burden, especially if the death of a spouse comes out of the blue. If one income is suddenly gone, it could mean the surviving spouse would need to use credit or liquidate assets to cover final expenses. As you would probably agree, neither of these are attractive options. A term life insurance policy can cover final expenses, leaving one less worry for your family.
Pay Off Debt
The average household in the U.S. is carrying nearly $140,000 in debt.³ For households with a large mortgage balance, the debt figures could be much higher. Couple that with a median household income of under $60,000,⁴ and it’s clear that many families would be in trouble if one income is lost.
Term life insurance can be closely matched to the length of your mortgage, which helps to ensure that your family won’t lose their home at an already difficult time.
But what about car payments, credit card balances, and other debt? These other debt obligations that your family is currently meeting with either one or two incomes can be put to bed with a well-planned term life policy.
Even if you’ve planned for final expenses and purchased enough life insurance coverage to pay off your household debt, life can present many other costs of just… living. If you pass unexpectedly, the bills will keep rolling in for anyone you leave behind – especially if you have young children. Those day-to-day living costs and unexpected expenses can seem to multiply in ways that defy mathematical concepts. (You know – like that school field trip to the aquarium that no one mentioned until the night before.) The death benefit of a term life insurance policy may help, for a time, fill in the income gap created by the unfortunate passing of a breadwinner.
But Wait, There’s More… There are term life insurance policies available that can provide other benefits as well, including living benefits that may help keep medical expenses from wreaking havoc on your family’s financial plan if you become critically ill. One note about the living benefits policies, though: If the critical and chronic illness features are used, the face value of the policy is reduced. It’s important to consider whether a reduction in the death benefit would be a good alternative to using savings planned for other purposes.
In some cases, policies with built-in living benefits may cost more than a standard term policy but may still cost less than permanent insurance policies! And because a term policy is in force only during the years when your family needs the most protection, premiums can be lower than for other types of life insurance.
Term life insurance can provide income protection to help keep your family’s financial situation solid, and help things stay as “normal” as they can be after a loss.
¹ United States Department of Labor. “Employment Characteristics of Families Summary.” Bureau of Labor Statistics, 4.19.2018, https://bit.ly/2kSHDvm.
² “Funeral Costs: How Much Does an Average Funeral Cost?” Parting, 9.14.2017, https://bit.ly/2isoHUC.
³ Sun, Leo. “A Foolish Take: Here’s how much debt the average U.S. household owes.” USA Today, 11.18.2017, https://usat.ly/2hJ7lah.
⁴ Loudenback, Tanza. “Middle-class Americans made more money last year than ever before.” Business Insider, 9.12.2017, https://read.bi/2f3ey3F.
Permanent Life Insurance: Designed to Last a Lifetime