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Types of Life Insurance

Should I buy term insurance or permanent life insurance?

I am a 42 year-old self-employed husband and father to an 18 month old son. I have a $150K Variable Annuity Policy through State Farm and would like to supplement it with another $500K policy. I would like to know that my wife and son are taken care of upon my passing. I would like your advice as to what type of life insurance plan that I should purchase or whether I should just purchase a term policy and invest the money that I would spend on insurance premiums. I am healthy and come from a long line of octogenarians.

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Highlights

  • Term life insurance is ideal for people who require coverage for a specified period of time.
  • The four primary species of permanent life insurance are Whole Life, Universal Life, Limited-Pay, and Endowment.

I have a strong opinion on what type of life insurance is the most effective, but despite my bias I believe I can offer a dispassionate overview of each. My conclusion may not be so unbiased.

In general, there are two types of life insurance — term and permanent. Let us look at each.

Term Insurance

Term life insurance provides coverage for a defined number of years paid for by a regular premium. Term life insurance is ideal for people who require life insurance only for a specified period of time. For instance, if you want protection for your children until they graduate from college at which time they will be self sufficient, then a term life policy that expires when they turn 22 may be the ideal fit for you.

Permanent Life Insurance

Permanent life insurance provides coverage until the death of the insured, with the exception of cancellation if the insured fails to pay the premium. Permanent insurance is usually sold with the promise that the premium will never increase, and the benefit will increase over the face value as the policy and insured age. The four primary species of permanent life insurance are Whole Life, Universal Life, Limited-Pay, and Endowment.

Whole Life Insurance

Whole life insurance provides coverage at a level premium and includes a cash value table that is guaranteed by the insurance company. If you want insurance that never expires and eliminates your investment risk, a whole life insurance plan may make sense for you.

Universal Life Insurance

Universal life insurance is a relatively new insurance product that provides the permanent insurance coverage of whole life with greater flexibility in premium payments as well as the potential for greater growth of cash values. Universal life is ideal for individuals who want a life insurance plan that never expires and are comfortable making investment decisions and taking risks.

Limited-Pay

Limited-pay is a form of life insurance in which the premiums are paid over a set period of time (such as 10 or 20 years) after which the policy remains in force without the need for the policy owner to pay any additional premiums. These types of policies are ideal for individuals who want insurance for life but do not want to make payments past a certain date — such as when they turn 65 and income may be limited.

Endowments

Endowments are a form of life insurance where the death benefit can be paid while the insured is still living. Endowments are the most expensive form of insurance because the endowment date (the date the policy pays) is earlier than in other policies. While these have historically been used as tax shelters they will be beneficial to very few people today due to changes in the tax laws.

Recommendation

Insurance companies survive and thrive by understanding actuarial tables better than anyone. You mentioned you are a 42-year-old male living in the US (presumably). The odds are you will live another 35.79 years. Your spouse will live another 39.82 years, assuming she is also 42. Your odds of dying in the next 12 months are .2842%. Your spouse's are .1720%, assuming she is also 42. Term life insurance is, essentially, a bet between you and the insurance company where you, perversely or morbidly, are betting you will die. The insurance company, after looking at your age, gender, and health, gives you odds on your surviving the term of the policy.

Term insurance is inexpensive for younger people, from an out-of-pocket perspective, because the actuarial tables show that people in their 20s, 30s, and 40s rarely die. That is not to say that no one in their 20s, 30, and 40s dies, but the occurrence is unusual. Term insurance premiums for younger people in good health who do not use tobacco products is so cheap it is almost a no-brainer decision for heads of households.

Term insurance costs more for older people, and therein lies the disadvantage for term insurance. Term insurance may be unaffordable or unavailable for seniors or people with chronic health issues.

That is where whole life insurance has an advantage. The insurance company will average the price of the premium over the expected life of the insured. This means the insurance premiums are higher than term for the same coverage early in the policy and life of the insured, but lower when the insured is older.

What should you do if you want more life insurance coverage? Shop for a term policy. Expect a wide array of prices because insurance companies look at actuarial tables differently. Some whole life policies allow the insured to increase the amount of coverage easily. Contact your whole life insurance agent and ask if you can boost the amount of coverage. Compare the cost of a term policy verses the cost of amending your policy. You want additional coverage to help your family in the unlikely event of your demise before your child becomes an adult, but may not need it later. Look closely at a term policy as your first choice.

I hope this information helps you Find. Learn & Save.

Best,

Bill

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