Life insurance comes in many varieties, depending on what the applicant wants. People who seek low premiums and only need a death benefit often turn to term life. However, those who view their life insurance policy as more of an investment vehicle will typically select either whole life or guaranteed universal life.
As is the case with most other investment categories, there are advantages and disadvantages for each type. Consumers should know how each major category of life policies work, what the normal pros and cons are and which kind is the one best suited for their own financial goals.
It’s a fact that anyone can benefit from having a life insurance policy to ensure your loved ones are taken care of in the time of need, but the question is: what type is the best fit for you?
The following descriptions of whole, term and guaranteed universal policies should give you a good idea of which type to choose from. Note that there are many variations within each category. Once you decide on the type you prefer, speak with an agent in order to understand the many variations within the category you’ve chosen.
Every carrier offers different products, so it helps to ask a lot of questions about premiums, rates of return, how taxes are handled, and other relevant topics related to a policy you are considering. It pays to spend time researching the topic before making a commitment. However, purchasing the right life insurance policy can go a long way toward helping you secure your financial future.
Term life insurance is the least costly of all the policies you can choose from. In its most basic form, term policies are sold for a specific number of years. Typical terms are 5, 10, 20 and 25 years long. At the end of the term, if the policy-holder is still living, the policy expires and no benefit is paid. If the policy-holder dies any time before the term of the policy expires, the death benefit is paid out to the designated beneficiary listed on the policy.
The death benefit is stated on the policy as well and was set at the time the holder purchased the policy. For most people, term life insurance is an acceptable way of making sure that loved ones will reap a financial payout in the event of an untimely death of the policy-holder.
- Pros: Advantages of term insurance are many, but the primary one is cost. Many factors affect the premium on term policies, but the applicant’s age and gender are paramount. After that, insurers will use a table to arrive at an annual premium amount based upon the death benefit amount and the number of years the policy will be active. Health issues can cause someone to be rejected for a term policy.
- Cons: A disadvantage of term insurance is that a policy can expire before the death of the policy-holder. When that happens, people often seek to buy another term policy but are surprised by the much higher rate. Because rates are primarily determined by age and health, older people whose term policies expire sometimes cannot obtain more coverage at a reasonable rate. Often, their age prevents them from getting any life insurance at all.
Note that there is a popular variation on term insurance called “annual renewable.” These policies are, as their name implies, renewed at the end of each year for a higher premium rate. In effect, the policy-holder is simply continuing to buy one-year term policies every 12 months. Annual renewable policies are ideal for people who are about to start a job that offers life insurance through the employer. For temporary needs, annual renewable policies serve a good purpose.
Whole life is completely different than term insurance. For one thing, the policy never expires and its fixed premiums mean that policy-holders need only keep up with payments in order to keep the policy in force. Whole life is often called “insurance with no surprises,” because it lasts for your entire life-span and all of its provisions are guaranteed.
- Pros: There are guaranteed returns on your investment in whole life policies but those returns tend to be pretty small compared to other options you have with your money. However, whole life’s premiums are fixed and policy-holders can eventually build up cash value. When that happens, you’ll be able to withdraw at least some percentage of the cash value or even withdraw the money before you die.
- Cons: Premiums tend to be higher on whole life than on other kinds of insurance. Additionally, returns on the money invested can be very low. Some consumers find whole life insurance quite hard to fathom. The complicated nature of whole life, as a financial instrument, means that some people shy away from purchasing this type of insurance.
Guaranteed universal life insurance is an option that many people find attractive when faced with the uncertainty of whole life and the chance that term insurance will expire before it can pay a benefit. In fact, guaranteed universal life, also known as GUL, combines the best features of term and whole life insurance.
Here are the pros and cons of GUL:
- Pros: By far, the big advantage of GUL is that it carries a fixed death payout and fixed premiums. No matter what your age, you pay the same premium year after year. The coverage offered by GUL policies is both affordable and easy to understand. Because there is not an “investment” portion of the policy, what you pay and what you receive are clearly spelled out and simple to understand. The coverage does not expire, as does term insurance.
- Cons: There is no cash value for GUL policies. Like term insurance, but without the expiration date, GULs are basically a death benefit arrangement for policy-holders. The coverage, compared to term policies, is less affordable. There’s also the chance that your policy will be canceled if you miss a payment, so it’s important to pay premiums on time.