What is the best type of life insurance?
If you’re not familiar with life insurance, it can seem like a different language. You’ll hear things like whole life, universal life, critical illness, term insurance, and temporary and permanent needs. Understanding a bit about insurance can help you make an informed decision about the coverage that’s right for you, your family or your business. Basically, there are two main types of life insurance: one to meet your temporary needs and insurance to meet your permanent needs. Here’s some key information about choosing the best type of life insurance:
Choosing the right policy
Choosing the right policy can be a confusing process. Some questions you should ask yourself are:
- Will the policy meet my current needs?
- Will the policy provide the flexibility to meet my future needs?
- What does the policy cost–both current and expected lifetime costs?
- Is the provider established and financially strong?
- Will the company back its guarantees?
Term Life Insurance
If you’re looking for basic insurance coverage for a specific period of time, term insurance is a good place to start. It’s a cost-effective and simple plan, with some flexibility to adapt to your long-term goals. Over time, your needs may change. Term life insurance can evolve with your needs by providing options to extend your coverage period or even to transfer to a permanent life insurance solution. One of the key benefits of term insurance is it is cost-effective for a short period of time. You are only paying for basic death benefit coverage so your insurance costs are minimized for the length of the term. Term coverage is available for 5 years, 10 years, 15 years, 20 years or to age 100. Premiums stay the same for the term but increase once the term is being renewed. For example, say I buy 10-year term insurance (T10); I will have the same premium over the 10 year period. After 10 years, I will expect to pay a higher premium for the next 10-year term. Depending on your policy and age at the end of your chosen term, you can renew your policy for another term, or convert it to a permanent life insurance solution. There are two potential problems with term insurance. Firstly, term insurance gets more expensive the older you get. Often this makes term insurance cost prohibitive at some point in time in the future. Secondly, term insurance will eventually run out. In fact, you may wind up paying for premiums and never collecting a benefit of any kind. Here is a sample of what it will cost per year for $250,000 insurance coverage for a 10-year term (Thanks to life insurance expert, Jeff Burchill for providing this data):
Notes: Rates are higher for smokers. Sometimes you can find better rates for ‘better than average’ lab results.
Permanent Life Insurance
Permanent insurance solutions allow you to insure against the unexpected while increasing the value of your investment over time. Plans can also be flexible. You can also select a plan that gradually minimizes insurance coverage so you can maximize your policy’s investment potential. There are three kinds of permanent insurance:
- Term to 100 (T100). Some people may classify this as a type of term insurance but the reason I classify this as permanent coverage is because you can never out live the benefit. T100 is the most basic form of permanent coverage.
- Whole life Insurance. Premiums remain fixed as long as the policy is in place. As long as the premiums are paid, the policy remains in effect. As the premiums continue to be paid, the policy builds up a cash value and also dividends. These dividends can be used to lower premiums, purchase more insurance or pay for term insurance. Whole life requires little to no management.
- Universal Life. The policyholder has more control over how the policy is structured. Policyholders are given more options to choose the type of insurance and investment options. This is the most flexible type of contract but with flexibility comes ongoing decision making.
Permanent insurance is more expensive and more complex than your basic term policies. Many financial gurus speak the benefits of “buy term and invest the difference” but remember that everyone has a unique situation and there are many instances where permanent insurance may make the most sense.
My five cents
Jeff Burchill and I were talking about the different types of life insurance and he asked me what I thought about choosing between term insurance and permanent insurance. I believe both types of life insurance have a place which is why they both exist. Personally, I own all three types: Term, whole-life and universal life and my favourite policy today is the whole-life policy I bought23 years ago to when I first bought life insurance. In fact, I wish I had a few more ‘”0’s” on that policy. That being said, remember everyone’s needs are different. To help you sort through your options and choose the best type of life insurance, you may want to speak with a professional financial advisor. He or she will have the expertise to help you choose the products and company that best meets your needs.
Great post. I agree with your comment about the “buy term and invest the difference” mantra. Although in some cases this is a financially smart decision to make, it’s not always the best move. For impactful decisions like life insurance investment, it’s best to take the time to disclose all the parameters, rather than relying on circumstantial heuristics that may not even pertain to your particular situation.
I think that perhaps you should also inform people that the ONLY way to get your money out of a whole life policy is to (a) borrow it and pay interest back on YOUR money or (b) cancel the policy, pay fees and no longer have the life insurance policy! I think whole life and universal life are terrible products personally that mislead people. Also, if you do die your beneficiary does not receive ANY of the monies you saved…all they get is the face value of the policy period…the rest of your cash defaults to company it was bought from. This is obe reason there is so much litigation against companies that sell these products. As for the level premium, if you dig deeper your premium on the life insurance goes up incrementally each year and as such the amount that was to go towards savings goes down. The consequence is that the client is not actually accumulating the savings they thought. Also, once the life insurance premium gets higher than the level premium the client agreed to the difference starts to be taken out of the client’s accumulated savings and can drain it the longer they live! Check the fine print on the policy, have another company review your policy and ask for actual financial statement.
how about whole life policy that you pay for 10 years and they claim you’re covered for life ? will the beneficiary receive less the longer i live or will it stay the same ?
I like to say if you have a temporary need for insurance (to cover a mortgage, a debt, etc) then buy term. But if you have a permanent need (final expenses, inheritance) but permanent like whole life, universal or term to 100.