A chart comparing different types of life insurance is often helpful when trying to figure out what is best for you and your family. Life insurance is sometimes hard to understand. However, it doesn't need to be this way. There are several things you should look for when analyzing policies.
First of all, is the death benefit guaranteed?A death benefit is only good when it pays off. If you die without the policy in force, you get nothing. If you want it to pay off, look for a guaranteed death benefit.
Cash value. Cash value is only necessary when you want to combine elements of savings with your insurance policy. This could be very valuable in many situations, but it does increase the amount of money you pay in premiums for the policy.
Is it permanent? Many financial advisers will argue that you don't need permanent life insurance. I'm not convinced. You will eventually die, right? Who pays the funeral expenses? Burial? This is why permanent insurance is important. Even if you leave behind some of your retirement savings for this purpose, it's still a bad idea. Why? Think about it--you can pay for your funeral on a $1 for $1 basis by using all of whatever is left of your retirement savings when you die. Or, you can give the insurance company a small fraction of your retirement savings in exchange for a life insurance policy, and your final expenses are a fraction of the cost that they would otherwise would be.
Are the premiums affordable? If you can't afford to make premium payments, it really doesn't matter what type of insurance you buy. Make sure you can pay a lifetime's worth of premiums if need be. Some policies will be paid up when you retire, but if you can afford to pay them into retirement, then you'll have the peace of mind of knowing that your family won't be stuck with your final expenses.
Basic insurance coverage. As you can see from the chart, term insurance is nothing fancy. The insurance company guarantees the policy will remain in force and pay the death benefit. As long as you pay premiums on time, you're good to go.
Whole life is permanent insurance. It's considered the "Cadillac" of insurance policies. Guaranteed death benefit like term, but premiums are wickedly high. You get a nice cash value savings to go along with that policy though. That cash value may be used at any time and for any reason.
Universal life, or UL for short. This one's a half-breed. These are considered "investment policies" because the insurance company normally allows you to invest some or all of your premiums into either a fixed interest account or mutual funds. Some UL policies provide strong cash value accumulation which has the potential to exceed whole life's cash value growth. The downside to these policies is that there's no guaranteed death benefit.
These policies work like this: You deposit money into the cash value account. The insurer credits the account with interest and will deduct the cost of insurance from that account. When there's no more cash value left, the policy terminates. The cost of insurance continues to rise each year. If your investments in the policy perform well and outpace the costs of the policy, you've got nothing to worry about. However, if your policy's investments fall in the toilet, or the cost of insurance rises faster than the interest being credited to your account, then you could end up losing your insurance. Not exactly a permanent insurance solution when that happens.
Some policies do offer a guaranteed death benefit, but have weak or nearly non-existent cash value growth. Premiums are lower on this kind of UL, closer to term premiums, which might make it worth your time to check out. Especially since this provides death benefit coverage out to age 120 in most cases.
A chart comparing different types of life insurance won't tell you everything you need to know, but it will give you enough to go shopping for a policy.
|Term Life||Whole Life||Universal Life|
No, but does accumulate
non-guaranteed cash value