Unfortunately, people often end up with the wrong type of policy when it comes to life insurance. We consulted with a former financial planner of sixteen years, and he laid out the most important types of insurance and what they really cover. Here is an overview of the four main types of life insurance policies available.
1.- Term life insurance:
- Most appropriate for temporary or short-term needs.
- Very inexpensive for younger individuals; becomes cost prohibitive for older individuals.
- Unlike other types of life insurance policies, you do not build any equity in the policy.
2.- Whole life insurance
- Best used for smaller policies ($50,000 and less).
- Intended to be for long-term or permanent coverage.
- Cost of coverage is generally more expensive than term policies at younger ages, but does not increase as you get older.
- Builds equity which can be used to pay premiums in later years or returned to you if you no longer need the insurance.
- Arguably an “antiquated” product which does not have the flexibility and features of universal life insurance policies.
3.- Universal life insurance
- Better for younger and middle-aged individuals with long-term insurance needs.
- Can build equity at a faster rate than the more traditional whole life insurance policy.
- Premiums are flexible; once you build enough equity, you can skip payments or stop making them altogether.
- Insurance amount (death benefit) can be increased or decreased without having to change to a different policy.
- The interest you earn on your equity adjusts up and down based on the prevailing interest rates in the economy.
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4.- Variable universal life insurance
- Most appropriate for younger individuals or when the intent is to keep the insurance until death..
- Premiums are flexible; once you build enough equity, you can skips payments or stop making them altogether.
- Insurance amount (death benefit) can be increased or decreased without having to change to a different policy.
- Allows you to invest your equity into variable accounts (mutual funds) which are tied into the stock market.
These guidelines are by no means all inclusive. Therefore, if you are considering purchasing life insurance, or making changes to life insurance you already own, find a trusted financial advisor or insurance agent. Find someone that will spend time with you asking you questions about your priorities and concerns. I promise you, you won’t get this from purchasing life insurance over the internet or by calling a toll free number. And certainly, working with someone face to face does not guarantee the best advice either.
Choosing the best financial advisor or insurance agent
- Find someone with experience. Life insurance policies are not “one size fits all” and your agent should have the experience to design a policy customized for your needs. This ability comes only with experience.
- Stay away from an agent that only represents one company. Insurance companies are rated on their financial stability, customer service, ease of claim payments, cost, etc. You’ll want an agent that has access to the companies that are best for your situation.
- Likewise, stay away from an agent who only offers one type of policy. For example, there are agents who work for companies that sell only term life insurance. They are skilled at convincing consumers that term life insurance is better than anything.
- Most importantly, work with someone who is willing to spend time with you, offer you different options, and explain the advantages and disadvantages of each and how it may impact your needs now and in the future, and help you calculate the appropriate amount of coverage you should have.