Life Insurance
Life insurance most simply put is a tax free dollar amount that becomes available to a beneficiary once an insured person dies. There are two categories of life insurance, one is term life insurance. The other is permanent life insurance. Within those categories, there are several types, for example, permanent life insurance has whole life, and universal life. Within each of those types there are different versions, such as final expense whole life and fully underwritten whole life. Or even with universal life, which could be set up as fixed, variable, or indexed.
Term life insurance is sometimes described as “renting” life insurance, the reason is because you are paying a premium for a specified number of years then it’s done and there is no cash value or equity in the policy, this is because the premium and the cost of insurance are almost the same over the course of the term. The main benefit of choosing the term life insurance option is that the premiums are considerably less expensive for each unit ($1,000) of life insurance. Ideal scenarios for this type of insurance would be people with high amounts of debt that will be paid off before the term ends or people with younger families where longer term income replacement will be needed. The downside of term is that no one has the crystal ball to tell them how many years they will live, thus creating somewhat of a gambling effect. In fact, according to a recent study done by Penn State University, term life insurance only pays out 1% of the time. That’s why people tend to not use term for things like final expenses or burial.
Permanent life insurance differs from term in that it lasts for the duration of a person’s life. It also accumulates usable cash value or equity from the difference between the premium paid and the actual cost of insurance for that year. The cost of insurance is figured based on age and health. The main benefit of having a permanent life insurance policy is that no matter how long a person may live, their policy will remain in force and effective. To revisit the gambling notion, I’d rather be on the 100% chance side than the 1% chance side, on account of the fact that everyone dies. Ideal candidates for permanent life insurance range from people looking to pay for their final expenses to people looking to do business planning or generational wealth transfer. The main downside for permanent life insurance is that premiums are undoubtedly higher than that of term life insurance. The other downside is that there are many ways of going about setting up some of the more complicated permanent life insurance policy and sadly, the reality is some people just don’t know what they’re doing.
The truth about life insurance is that there’s a time and a place for all the different versions because every person has their own set of resources and needs. The other truth about life insurance is that it will take longer for a person to put away the amount of their premium to reach the amount of their death benefit if they try and do it at a bank. For example, a person wants to leave $15,000 for their final expenses and they decide to save $100 a month in a savings account. What would their beneficiary get if that person died in a car accident after only two months? The best case scenario would be $200, wouldn’t the beneficiary be in a better position with $15,000 for the same money?
