Things to consider when choosing a life insurance policy
No matter your age, buying life insurance is a wise move. The benefits as we get older are well-known, as a good policy may replace years or decades of family income if a policyholder passes. But even younger individuals can benefit from policies paying off funeral expenses and creditors. And establishing an early relationship with a provider can save policyholders significant money as they get older and starting coverage becomes more expensive. Then, there are the asset protection, estate planning, and tax advantages of certain policies.
Nevertheless, choosing the right option can be a bit confusing. For instance, there are different types of life insurance, and you’ll likely run into the terms “whole life” and “term life.” Let’s walk through the differences and when whole life insurance might be the right choice.
Term life vs. whole life insurance
Term life insurance is a common type of policy designed to cover you for a fixed period, usually 10 or 20 years. It’s a popular choice because the premiums can be very affordable. However, there are some drawbacks. A term life policy only pays out if you die during the specified term. That means you won’t receive any money if you outlive the term.
If you’re looking at term life insurance, consider your financial obligations. For example, if you have young children, you’ll probably want a longer term to ensure they will be financially protected if something happens to you.
Whole life insurance — also called “permanent” life insurance — is a more durable type of life insurance. Unlike term life, a whole life policy pays out no matter when you die, whether it’s five years or 30 years after you buy the policy.
There are other things to consider when buying whole life insurance. Here are some key elements to review so that you can make the right decision for your family, budget, and circumstances.
Benefit 1: Tax-free death benefits
The death benefits associated with whole life insurance are tax-free as long as the benefit is less than federal and state caps. Since the federal exemption limit is $5.5 million, most people fall well below the relevant threshold.
Many states do impose estate taxes, so research the inheritance laws in your state to determine how much your family might have to pay in taxes.
Benefit 2: Flexibility in paying for the policy
Your premiums can be paid annually, bi-annually, or monthly, so there is some flexibility in how you choose to pay. You can also shorten the billing period by paying a higher premium. This is a good way to secure coverage now in case your financial situation changes due to a job loss, reduced income, severe illness, or loss of investments.
Benefit 3: Cash value account
A whole life insurance policy grows in value over time. Its cash value refers to an amount that accumulates and can be borrowed against or withdrawn from the policy. The cash value is tax-deferred, and another key benefit is that it is guaranteed to grow at a particular rate.
Benefit 4: You may collect dividends for strong performance
Dividend-paying whole life insurance has an added benefit that allows you to earn a share of dividends if the insurer performs better than expected. In other words, you share in the profits if the company does well.
Benefit 5: No medical exam options
Many insurance providers use medical exams to evaluate your risk and determine premium amounts. If you don’t take a medical exam, you might have to pay a higher premium since you could be seen as a higher risk to insure. And even if you don’t have to undergo a medical exam, you’ll still need to answer a lot of questions about your medical history in the application.
With some whole life insurance policies (called “guaranteed issue” life insurance), you have the option to skip the medical exam. You can also choose not to answer detailed questions about your health. Note that there are pros and cons to these options.
Are there any downsides to whole life insurance?
There are a few things to consider when deciding whether to choose whole life insurance. In general, whole life policies are more expensive than term life policies. The amount of the death benefit and the coverage time horizon directly affect the cost, so it’s important to assess your needs to understand how much coverage is required to protect your family.
While you might collect dividends if your insurer performs well, there’s no guarantee that will happen every year. Profits could go down, in which case, you won’t see dividend payments.
Also, while you might prefer to skip a medical exam or health questions, you could end up paying a significantly higher premium for those types of policies. There may also be limits on the death benefit. Finally, there may be a restricted period for the first few years of the policy. If you die before the end of the restricted period, your family won’t get the full payout.
Secure the future for your family
Whole life is still a popular type of coverage, but not everyone knows enough about its advantages and whether it’s right for their situation.
NICRIS Insurance can help you understand the ins and outs of life insurance options and choose the right policy for your needs. If you have questions or would like a free, personalized insurance review, just drop us a line.