I get asked this question almost every time I begin a life insurance policy review. Most people don’t understand that life insurance comes in many shapes and sizes and the different types of life insurance are designed to protect against different needs. I have come across clients who purchased a 20 year term policy 10 years ago and don’t realize that their coverage will end in 10 years. They assume they have life insurance coverage forever.
So what is the best type of life insurance? That’s a loaded question and is specific….Very specific to the needs and situation of the client. There are generally two types of life insurance policies, and while they have different names at different companies, for the sake of pure simplicity we will categorize the two types as term or “[intlink id=”1″ type=”post”]temporary[/intlink]” and whole life or “[intlink id=”65″ type=”post”]permanent[/intlink].” Term policies usually cover the life insured for a specific period of time, usually, 10, 15, 20 or 25 year terms. Permanent policies cover the life insured for the entirety of their life.
So how does one go about choosing the right policy? Well like with most decisions, it is important to figure out why you NEED the policy. Will the need go away within a specific period of time or is it a need that will only go away when you die…Whenever that may be?
The question of need is one of the most important ways of determining what sort of policy is right for a client. A client who has a 3 year old child and worries about how his child will be taken care of financially if he were to die before the child finishes university may want to protect against that risk by buying a term 20 policy to pay out a lump sum to the child or trustee. This policy will only pay out if the parent dies within the 20 year term. At the end of the 20 years, the “NEED” no longer exists as the child would have finished university and the parent is no longer concerned about protecting against that specific need.
Now what if the child in the example above was severely handicapped. The parent in this case may now be concerned about how the child will be taken care of financially “WHEN” the parent dies.
We know that in both cases the parent will one day die, but in the first case, the parent is only concerned about how the child will fare “IF” they die within a specific period. A period the parent believes the child to be most vulnerable. In the second case, because of the child being handicapped, the parent believes the child will become vulnerable “WHEN” the parent dies, and since there is no way of knowing when the parent will die, a whole life policy better suits the need.
Some additional factors to consider are that [intlink id=”1″ type=”post”]term policies[/intlink] start out cheaper than whole life policies and for this reason most people choose term policies without truly considering their specific personal needs…But remember that they become extremely expensive as the life insured gets older. Whole life policies start out more expensive but have a level premium throughout the life of the policy. Term policies also have no cash value, while whole life policies generally accumulate cash value. Most people never personally benefit from a term policy, but many [intlink id=”65″ type=”post”]whole life policies[/intlink] pay out dividends and the cash value can be borrowed against while the policy owner is still alive.
To determine what type of life insurance best suits your needs, reach out to me directly and I will guide you through the process of choosing a policy that best suits your needs.