How to Compare Life Insurance Policies

This post is to support the Life Insurance Movement by Jeff Rose of Good Financial Cents.

Do you remember the last time you went to an all you can eat buffet and you were overwhelmed by all the choices?   Do you eat the crab legs, prime rib, or the lemon baked salmon? Crap!  You just spotted the dessert tray that has every dessert known to man.

When it comes to comparing all your options for life insurance, it can be just as overwhelming as a Las Vegas buffet.  Do you choose term insurance, whole life, or universal?  And what’s this talk about return on premium riders or cash value build up?   Before you choke on that chicken bone too soon, take a deep breath.   Let’s look at closer look at all the options when we compare the different types of life insurance policies and which might be best for your situation.

Life Insurance Policy Comparison

First Stop: Comparing Term Life Insurance

The most common type of insurance is term insurance which can otherwise be known as “temporary” insurance.   Term life builds no cash value and once either the term is up or you stop paying the insurance, the policy is over.  If you die, your heirs will benefit from a tax free payout of the face amount of the policy.   Term insurance is very attractive for younger individuals mostly because it’s so cheap, but still can find its place in a boomer’s life insurance plan. There are four basic types of term life insurance:

  • Annually renewable term life insurance. Annual Renewable and Convertible Term is term insurance that is automatically renewable at the end of each one-year term period, with generally increasing premiums.
  • Convertible term life insurance. It allows you to convert your policy to a whole life insurance policy with no additional underwriting.
  • Guaranteed level term life insurance . Guaranteed Level Term insurance offers term insurance protection for the term of the policy with guaranteed level premiums and may be renewed thereafter without evidence of insurability at an annually increasing premium scale.
  • Return of premium term life insurance. Return of premium term life insurance (ROP)  is unique in that it allows the policy holder to get a full refund of all the premiums paid at the end of the contract. This type of term life insurance policy is a bit more expensive than regular term life insurance, but the premiums are designed to remain level.

Second Stop: Comparing Permanent Life Insurance

Permanent life insurance has the ability to provide coverage for your entire life and will stay in force so as long as you continue to pay for the premium or the built up cash value pays the premium for you.  The cash value is the distinguishing factor between permanent life insurance and term life.

Whole life insurance

Whole life insurance  is a type of insurance that remains in place for your entire lifetime.  Unlike term life, it does not expire, never needs to be renewed, and cannot be revoked.  When you take out a whole life policy, the premium will stay level.  As you continue to pay your premium, the cash value should build up and as your dividends are reinvested.

Universal life insurance

Another form of permanent life insurance is universal life.   Universal life is similar to whole life except that it separates the three components of the policy: death benefit, expenses, and cash value.  By doing so it gives the insured more options as you age and your needs change.   Having this type of flexibility, however; does make these policies more expensive that their insurance counterparts.  Here are some of the characteristics of a universal life insurance policy:

Universal life insurance premiums are flexible.

At the beginning of the policy, you’ll have to stay regular with your premium payments.  As you keep paying those premiums, the cash value should accumulate and grow as long as the underlying investments grow.  When his occurs, you won’t be required to pay as much to keep  the policy in force.   Warning: if those investments decrease in value, you’re once “paid up” policy will now require to keep paying those payments.

Universal life insurance has cash value.

As  you continue to make your premium payments, with time your policy will accumulate cash value what’s called the accumulation fund*.  The cash value is the amount that you can borrow from as the policy ages.  This is the amount that is often called the investment portion of the policy.

Death benefit.

Universal life insurance is just like the rest of life insurance policies, that your beneficiary receives a tax free death benefit when you die. This, and the features mentioned above, make universal life an attractive option for estate planning purposes.

*Just like variable annuity contracts, the cash value of these life insurance policies initially have surrender charges if you try and touch the money too soon.   As the policy ages, the surrender charge decreases until it eventually is nonexistent.  If you do try to pull money out, the cash value that you are allowed to withdraw is the cash value minus the applicable surrender charges.

Survivorship or 2nd-to-die life insurance

While universal life insurance is an effective estate planning tool, the premiums on two separate policies can get pretty expensive.  In walks the survivorship policy or other wise called 2nd to die life insurance. What makes 2nd to die policies less expensive is that the death benefit is not paid until the 2nd death of the two insurance policies, which is usually husband and wife.  Aging boomers that are looking to minimize their estate tax liability using trusts will incorporate these type policies in the estate planning process.

Comparison of Life Insurance Policies

Overwhelmed?  When comparing the differences of your life insurance options, it’s easy to be.   Be sure to sit down with an insurance specialist or an independent financial planner to help sort through the life insurance maze.

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