I'm looking for life insurance, and there are so many options....?

Question

I don't know whether i should go for term life, whole life or universal life insurance. What's the difference between them? Do the benefits and terms of payout vary? I want to make sure that my husband and child are well taken care of if something were to happen to me.

Answer 1

If that is all you want to do is just provide some cash if you should die---right.   TERM insurance is the best for a high dollar death benefit.  The premums are very cheap.  NON-smokers pay less than smokers.     Whole life and the rest are not cheap as a monthly payment.

Answer 2

First: Congratulations on even looking at the situation. A lot of folks don't until it's way too late.

Second: Let's discuss some various types of life insurance. Here are the basic forms of insurance.

First: term - this is for a specific period only. Most companies offer 10, 15, 20, some 30 and even 40 year term policies. There is no cash value accumulation within a term policy and it is basically renting your insurance for a specified period of time. It has its place, but the one bad feature of it is that you only win if you die. Most beneficiaries actually appreciate if the policy is in force at your death :-) and only about 1-2% of all term policies ever pay off because most folks drop it as they get older, simply because the costs become exhorbitant.

The idea for many is to buy the insurance cheaply and use what difference there would be between the term policy and what you would pay for a permanent policy and put that into a mutual fund. That may or may not be a good idea depending on your situation, and you might have to be concerned with tax consequences if it's a naked mutual fund (not covered within a ROTH IRA, for example.) Not everyone is eligible to use some of the "wraps". Unfortunately, a lot of folks also buy the term and do NOT invest the difference, but use it to buy "toys".

Second: there is permanent insurance. This is insurance that will cover you for your lifetime, no matter how long. There are various types of permanent insurance. A lot of folks only know of an older one called Whole Life. This is an insurance in which there is cash value growth within the policy. The premiums are fixed in this type of policy. The basic idea is that you make premium payments and what is above the necessary to insure you goes into the General Accounts of the insurance company and they usually guarantee you about 3-5% on this. However there is almost never any cash accumulation over the first five years and what they give you barely, if it even does, keeps up with inflation. Also as you age, the cash accumulation can be used by the company to pay for policy charges so these often lapse or the person winds up at retirement with little if anything in the policy.

There was another insurance called Universal Life which is similar in many ways to the whole life, but here the premium payments are flexible, but again any cash value accumulation is put into the General Accounts of the insurance company and guaranteed at about 2-5%.

Third:

Because both of these types of insurance didn't provide real cash value accumulation (and because back in the 1970's A L. Williams was creaming the insurance companies with "buy term - invest the difference", the insurance companies came out with a fantastic product, and it is a very very good one for a lot of folks. It's called a Variable Universal Life policy. Here, the cash value accumulates in Sub Accounts (which are owned by the insured and NOT the insurance company). These accounts are out in the market and get market rates of return. Depending on the portfolios that you are in, these can average anywhere from 8 - 12% over time.

These policies not only provide life long insurance for you, but the cash value in the account may be accessed tax free (as it may in the other cash value insurance) and if structured correctly, this can add much money to your retirement or even before so you and your partner may enjoy it even while you're alive (as well as having the death benefit if something happens to you).

About eight years or so ago, the insurance companies also created Equity Indexed Universal Life. In these policies, the cash value accumulation is a result of being compared to some index, usually the S& P 500 over the year. A lot of these policies average about 8% over time. They often usually have a cap and a floor and they are often very attractive to folks who like guarantees and who may be a bit older.

You're going to hear a lot of "sound bites" here. A lot of simply "buy term, invest the difference". "All cash value insurance is evil" etc. These are usually from folks who aren't even licensed to discuss the variable forms of insurance in front of someone.

I'm dually licensed, both with an insurance license as well as a security license (no, this is not a solicitation for business, I'm simply attempting to answer your question in as concise and correct as possible in front of a computer where I can't illustrate or draw things for you.)

I suggest that you might like to have your library request "The New Life Insurance Investment Advisor: Achieving Financial Security for You" by Ben Baldwin. It's a bit dry, but you can see for yourself that what I've said is accurate.

Please, if you speak to any agent local to you, make sure he/she is dually licensed so you can get the full story and not just the part of it that the singly licensed person wants to babble because it's the only way they can sell the only thing they have available.

Does this mean I think term is bad? Absolutely not. I often recommend it to folks who have a need for it, but usually it's a convertible policy that can be moved to a permanent one as their situation improves. However, term is NOT the be-all and end-all and it often increases in cost to a point where you can no longer afford it as you age. Also, say you're in a 20 year term, what happens if at age 45 you are suddenly diagnosed with cancer, or have a heart attack, etc. Your chances of having your policy renewed at age 46 again have dropped to about zero. If you died then at age 47 your loved ones would get nothing since no policy would be in force.

Now having said all of that, remember the basic reason for insurance IS insurance. Life insurance is to make your family "whole" again after your death and to replace your income to them. Structured correctly and with a knowledgeable agent who can correctly help you to assess your own situation, it can also help to provide you with a "living" benefit as well as its main benefit on your death.

Answer 3

First to Pigeonguy...you referenced A.L. Williams and his theories on Buy Term and Invest the Rest...A.L. Williams was a football coach with no financial credentials, so he falls under the same category as you mentioned of people that don't have the financial credentials to properly provide advice on the subject.  Unfortunately most people take what they read as gospel and didn't check the source, so he stirred up a bit of a storm.

As for the original question...The terms of payout do vary....Here is a quick description of each:

Term insurance...starts cheap and gets more expensive each time the term is up as you get older (Litterally into the hundreds of dollars a month range for a small policy when you are in your 50s-70s).  Builds no cash value and will expire at some point (ussually around age 80).  Think of this as renting a house....it's cheaper than buying a house, but you're not building equity in it and you really don't own anything, so if the landlord (the insurance company) wants to kick you out (policy expires) you can't do anything about it.  When you move out (cancel the policy), youjust hand back the keys and get nothing in return.  It's a good temporary fix, but not a viable long term solution.

Whole Life...Starts more expensive than term (roughly 60% more), but it will never increase, it builds cash value and will never expire.  This is like buying a house....you buy it and you have control of when you want to get rid of the place...you build up equity in it and if you cancel it you get some back in return.  You can also use it as colateral with a lender like the bank.  Some policies have a limited pay option where you only pay for 20 years (just like a mortgage...you pay for 20 years and then you keep the house after than).

Universal life has an investment component and genrally if you aren't maxing out your retirement savings (RRSP or 401K, where ever you are), this isn't really a good option for you.

Both have their merits and in my opinion anyone that flat out tells you to only buy term or to only buy whole life without knowing your goals and financial situation is not sound advice.

General rule of thumb....buy term for any needs that are less than 20 years (IE: child care for the kids, education for the kids, paying out mortgages and debts, etc) and buy a whole life policy for the expenes that will never go away (IE: taxes, funeral, legal fees) whether it's tomorrow or 40 years from now that you die.

To figure out how much insurance you will need, I would suggest seeking the advice of a local proffessional insurance agent that can recommend and critically analyze your needs for both Term and Whole Life.  They would have a better knowledge of your specific situation with regards to final expenses, taxation issues, etc in your area.

Answer 4

Go to Yahoo Finance, click on "Personal Finance" and read the section on life insurance.

Answer 5

VERY interesting guide info about your Question HERE:

http://all-insurance-online.blogspot.com

Good luck!

Answer 6

you should definitely speak with a licensed agent or financial planner.  but, term policies are the least expensive.  there are 5, 10, 15, 20 and 30 year terms available.  most term policies have the option of converting the term coverage to universal or a whole life policy.  you could always buy term now and if you decide that permanent insurance is what you need, you can always change it.

Answer 7

Most people now days are going with term.  But whole life and universal life have their place too.  My advice is to speak with a local insurance agent who represents many companies and ask for their help.  The insurance company pays their commission, so the price isn't any higher than signing up direct.  

http://www.insureme.com/landing.aspx?Ref...

If you fill out the form, a local agent will contact you.  Hope that helps!

Jared Balis

http://www.utahinsurance.org

Answer 8

Read the articles below to help understand the difference. These explain my reasons for choosing term life.