Bosworth & Associates in Tyler, Texas, understands that life insurance policies can be confusing. Not only that, but it can sometimes gets a bad rap for being a scam…which couldn’t be further from the truth. We wanted to break down the 3 basic types of life insurance in hopes of helping you understand the importance and the options you have.
Before we get into a breakdown of Term, Whole, and Universal insurance, let’s take a quick look at why life insurance is important:
Especially if you have a family, life insurance helps take a great deal of the financial burden and future financial burdens off of your spouse and extended family. It’s a form of family protection. It can be used to take care of the cost of a funeral, mortgage or house payment, college loans or tuition expenses, and many other expected and unexpected “life” expenses. You can think of it as a safety net.
It’s important to know that, no matter what, your family and dependents are taken care of if you’re no longer around to do so.
A general rule when buying life insurance, to get the most benefit for the least amount of money, is to buy it while you’re still young. The older you are, the more possibilities of pre-existing conditions that will cause your insurance premiums to go up.
One more thing before we continue…Let’s define “Premium” as it’s a term most often used in insurance, and especially life insurance.
An insurance premium is the money amount paid by an individual or business for an insurance policy. So, basically, payment for insurance. So, let’s take a look at the various types of policies.
Term life insurance is one of the more basic forms of life insurance. It’s a less expensive alternative to Universal or Whole life insurance. Because it’s less expensive, it can be a good alternative for younger people, as it is cheaper depending on age. It’s also good for those who want to cover their bases against accidental events.
With Term insurance, you have a fixed premium, meaning your payments won’t change. It’s set for a specific number of years. The time period is generally 10-30 years and usually averages around 20 years. It’s important when looking into term insurance, to choose a time frame that best makes sense for your family’s needs.
This type of insurance only covers a set period of time and will expire if you or your beneficiaries make a claim during years the policy covers. One drawback of Term insurance is that it doesn’t include savings and it isn’t a lifetime coverage.
The main purpose of Term insurance is to protect your beneficiaries/the people who depend on you in case of unexpected death. Term life insurance is good for you if you’re a young family just getting started financially, you can’t yet afford a more comprehensive policy like Whole or Universal, but you want to make sure your family is covered.
Whole and Universal Insurance are similar, but also have some big differences.
One large similarity is that they’re both “whole life” insurance. This means they last the duration of the policy-holders life, as opposed to Term life insurance, which is for a set number of years.
Whole life insurance has more expensive premiums, however, those same premiums have cash growth options during the time of the policy. Whole life insurance allows you to build your premiums over time, which means an accrued cash value payout when the policy is cashed in, as well as the policy’s final value.
A drawback of Whole life insurance is that it can be quite pricey, but it has a guaranteed “death benefit”—guaranteed cash value—as long as while you’re living, the premium doesn’t change.
Universal life insurance is more expensive than Term Life, but has the potential for longer-term benefits.
Both Universal and Whole Life Insurance are known as “permanent life insurance.” Both are also cash-value accounts. Universal Insurance is even sometimes called “cash-value” insurance.
Cash-value insurance can be good for parents who waited later to have kids and those interested in tax advantages available with such plans.
One of the main differences between Whole and Universal is the management of excess cash and premiums. Universal is more flexible in that you can make premium payments in whatever monetary amount or at the time you want. Meaning more freedom to manage your money.
With a Universal policy, the premiums change according to the current interest rates. During the time frame of the policy, the investment can be slow-growing, which can be a drawback. That being said, a large benefit of Whole and Universal Life Insurance is that, for the most part, the cash money accrued is tax-deferred and, during the time of the policy, can often be accessed.
These are important things to clarify when talking to your insurance agent about what life insurance is best for you and your family. At Bosworth and Associates, we take the time to sit with you and explain your options, so you feel the most comfortable making these important decisions.
Even though it’s a difficult conversation to have, discussing with your family what the best life insurance is for your needs and finances, is one of the most important conversations you can have. Making sure your family is taken care of after you’re gone is one of the most lasting expressions of love a person can give.