Life Insurance

Many of us buy life insurance, because we want to make sure our loved ones remain financially secure after we die.  For those interested in estate planning, cash accumulation, wealth transfer and estate tax liquidity, life insurance can be a tool to achieve those goals as well.

There are many choices when it comes to life insurance. Policies are now available from more than 2,000 life insurance companies in the United States, as well as from banks and other financial institutions.

Assessing your life insurance needs

The Illinois Department of Insurance says there are some basic things to consider, when you are buying life insurance:

  • Before purchasing a life insurance policy, you should consider your financial situation and the standard of living you want to maintain for your dependents or survivors. For example, who will be responsible for your funeral costs and final medical bills? Would your family have to relocate? Will there be adequate funds for future or ongoing expenses such as daycare, mortgage payments, or college?
  • You should reevaluate your life insurance policies annually or whenever you experience a major life event such as marriage, divorce, the birth or adoption of a child, or purchase of a major item such as a house or business.

The Illinois Department of Insurance points out the reasons you might buy life insurance will vary, depending on your age, financial situation and other factors.  Listed below are some examples:

  • Single person with no dependents: Funeral expenses; medical bills; debts, such as credit cards or student loans; elderly parents who may be dependent upon you for support. Note: Buying life insurance at a young age is cheaper. As you get older or possibly incur a serious health condition, it will be more expensive or difficult to buy a policy.
  • Single person with dependents: Funeral expenses; medical bills; outstanding debts; caretaker expenses for your surviving dependents; education costs for surviving children.
  • Couple with no children: Funeral expenses; medical bills; outstanding debts, especially mortgage or car payments.
  • Couple with children: Funeral expenses; medical bills; outstanding debts, especially mortgage payments; child-rearing expenses; education costs. Note: Even if one partner does not work outside the home, you may want to consider life insurance to help pay for childcare or other services performed by that partner.
  • Older couple: Funeral expenses; medical bills; impact on spendable income; outstanding debts, such as a new home, second vacation home, or recreational vehicle; impact on assets you may want to leave for children or grandchildren.

What are my options?

The two main forms of life insurance available are “term” and “permanent.”

Simply put, term life insurance provides death benefit protection for a specified period of time (for instance, you might buy a 10-year term policy). Generally speaking, if you’re looking for coverage for a short period of time, term life makes sense.

If you are interested in using the policy as a form of savings, consider a permanent life insurance policy. Regardless of the type of life insurance you buy, most policies require you to meet certain medical criteria.

Term life insurance

Non-Guaranteed Term Life

Non-guaranteed term life provides coverage only for a short time (usually a year) and is pure death benefit protection. The risk with term life is that your health might deteriorate and you could be unable to get another policy once the term is up. Premiums can also increase dramatically as you age. Term life insurance is a good choice for young people who can’t afford the higher costs of permanent insurance, or for people with financial obligations that will disappear in time, such as a car loan or a mortgage.

Annual Renewable and Convertible Term

Annual renewable term insurance policies are for multiple years, usually 10, 20 or 30 years. By buying a longer term policy, your costs can be stretched out to avoid the annual increases found in non-guaranteed term life.

Convertible term is similar to annual renewable term, but it offers the opportunity to convert the coverage to a permanent policy in the future — when regular term premiums might become cost-prohibitive because of your age or health. This is a good choice for young people, who are unable to afford the higher cost of permanent insurance right now.

Permanent life insurance

Whole Life or Ordinary Life

Similar to annual renewable term and convertible term, whole life policies stretch out the cost of insurance over a longer period of time. With whole life policies; however, the costs are spread out over your entire life. Once your premiums are paid up, the excess dollars are invested by the company. In essence the insurance company is managing the investment of your excess premiums, and that’s why your choice of company is so important.

With this type of policy; however, the inflexibility of premium payments could become a burden if your expenses increase or if you lose your job.

Universal Life

This option offers greater flexibility than whole or term life. After your initial payment, you have the option of reducing or increasing the amount of your death benefit. If you choose to increase your benefit, you may have to provide medical proof that your health has not deteriorated. Also, after your initial payment, you can pay premiums any time and in any amount, as long as you don’t miss a payment.  In some cases, there are limits to how much extra you can pay in advance premiums.

You will need to manage these policies to maintain sufficient funding, especially because the insurance company can increase charges.

Variable Life

As the name suggests, Variable Life policies offer fluctuating benefits.  That’s because the insurance company invests your premiums.  The insurance company offers you a choice of funds, in which your money will be invested.  The amount of money your beneficiaries will receive and the cash value of your policy depend on how well the insurance company invests your money.

There are both Universal and Whole Life versions of Variable Life.

In most variable and some universal life insurance policies, if your investments perform well, you’ll have a higher cash value and death benefit (some universal and variable universal policies also allow you to add your cash value into your death benefit). If the investments lose money, you’ll have a lower cash value and death benefit. Some policies will guarantee a minimum death benefit.

You can also take loans against the cash value of your policy, but if you don’t pay them back with interest, your beneficiaries will receive a reduced death benefit. You can also surrender your policy for cash or convert it into an annuity, but keep in mind that cashing in a permanent policy after only a couple of years is an expensive way to get insurance protection for a short time.

Look closely at the investment options insurance companies offer for Variable Life policies. Make sure they are well-balanced, and give you an opportunity to invest at your own risk tolerance.

How do I know if a life insurance policy is right for me?

After reviewing the various life insurance policies available, you might still be unsure about which best meets your needs. The American Council of Life Insurers recommends consulting with an insurance agent.  ACLI spokesman Jack Dolan says an agent can recommend policies that he or she thinks will meet your needs. “Look at the recommended policy with care to be sure it fits your personal goals, Dolan says. “Often, an agent will provide a ‘policy illustration’ that shows how the policy will work.”

Carefully study your agent’s recommendations and ask for a point-by-point explanation. Make sure the agent explains items you don’t understand. Because your policy is a legal document, it is important that you know what it provides.

The ACLI also makes the following recommendations, when deciding which type of life insurance to purchase:

If your agent recommends a term policy, ask:

  • How long can I keep this policy? If I want the option to renew the policy for a specific number of years or until a certain age, what are the terms of renewal?
  • When will my premiums increase? Annually? Or after a longer period of time, such as five or 10 years? Can I convert to a permanent policy? Will I need a medical exam when I convert?

If your agent recommends a permanent policy, ask:

  • Are the premiums within my budget?
  • Can I commit to these premiums over the long term?
  • How much will I receive if I surrender the policy?

The ACLI points out that permanent insurance provides protection for your entire life. If you don’t plan to keep the policy for many years, consider another type. Cashing in a permanent policy after only a few years can be a costly way to get short-term insurance protection.