The Lowdown on Life Insurance
What is the best life insurance policy? The simple answer is the one in force at the time of death. A beneficiary that just lost a loved one will be very appreciative of the death benefit, regardless of the type of life insurance policy that results in the payout of a death claim. But the answer to this question can also be complex. There are so many types of policies available in the marketplace and varying opinions on what type of insurance you should purchase.
There are two broad categories of life insurance: term and permanent. A simple analogy is comparing these two types of policies to renting or buying a home. Term is like renting – you pay rent for the use of the home and are shielded from the elements. When you move out, the landlord is not going to give you any of the rent money back. On the other hand, permanent is like buying a home. You make your mortgage payment and are shielded from the elements. If you decide to sell it, you have the opportunity to get some, all or more than the amount of money invested back.
As with renting versus buying, term versus permanent leads to the discussion of cost. We typically think that home ownership is more expensive due to property taxes, maintenance and upkeep of the property. Thus, the thought tends to be that term is less expensive than permanent.
Term insurance usually has a lower initial premium because you are paying the cost of insurance plus expenses associated with underwriting factors such as age, sex and the likelihood of dying during the term of the policy. The high cost of term insurance comes into play when you outlive the term and have to get a new policy at an older age, or the level term has expired and converts to annual renewable term insurance that goes up every year based on your age. This means that at some point in the future, the term policy could become unaffordable.
Permanent insurance tends to have a higher premium than term policies being applied for at the same age, same level of coverage and underwriting classification. Most permanent policies allow you to lock in at a premium that will stay level throughout your lifetime. The majority of permanent policies add an internal savings element, or cash accumulation fund by paying a return on the premiums paid. This allows permanent life policies to provide a consistent death benefit for their beneficiary but also provide living benefits for the owner. Most term policies only provide a death benefit.
So, which is best? The answer is the type of life insurance that best meets the needs of you and your family, is affordable and will be in force when needed. If you have questions or want additional information, contact your local Farm Bureau agent and let them help you develop a solid insurance plan for you and your family.
– Alan Williams