Understanding Term Life Insurance and Permanent Life Insurance
To gain a better understanding of Life Insurance we need to break down what this product actually does and define its basic uses. When approached in this manner we can understand why Life Insurance is so important and how we can best use this product to protect our family or business.
Looking at the root words, Life and Insurance, we are given words that are broad in meaning. However, used together and properly defined as a definitive word, we can easily identify more specific types of Life Insurance and their uses. Life insurance is a product that can be defined by answering the questions of what, when, and how? QUESTION: What does life insurance do? ANSWER: It buys replacement income or provides asset protection. QUESTION: When does it perform? ANSWER: Upon the early or untimely death of an individual. QUESTION: How it does work? ANSWER: Through a written and agreed upon contact of known risks available. If all the above is true, we could identify life insurance as: A written contract of known risks that will pay out and replace the income and/or protect the assets of the insured upon their early or untimely death. Wow! That was pretty straight forward and easy to understand. Wasn’t it?
To understand Life Insurance we must also recognize that there are two types or categories of Life Insurance. These types have a name or title that is descriptive of their use. The two types are Term Life Insurance and Permanent Life Insurance. Each has its own place within our risk management for either our family or our business. How you decide to manage those risks will determine the kind of Life Insurance that you should purchase.
Term Life Insurance defines a temporary period of time for a death benefit to be covered. The term, or the period of coverage, is agreed upon at the inception of the policy and will terminate at the end of that known period of time. The most common periods of duration are 10, 15, 20, 25, or 30 year periods. Term Life Insurance should be used to provide coverage for the replacement of income that would have been earned in order to help meet obligations during a set period of time. A Term Life Insurance plan can also be used in estate planning for short term tax related obligations. There are also different types of Term Life Insurance products. There are Annual Renewable Term Life, Declining Term Life, Level Term Life, and Level Term ROP Life, (ROP, acronym for Return of Premium). Each product type has its own advantages for the protection of your family.
Permanent Life Insurance can be defined as permanent throughout the life of the insured individual. Permanent Life Insurance is only permanent in the sense that the policy will not terminate or lapse if certain performance measures are met during the life of the policy. Guaranteed levels of performance are built into the policies to protect the insured. It is always a good idea to ask what the premium would be for a No Lapse Lifetime Guarantee. Projections are not guarantees and you should not be making life insurance decisions based on projections on how the stock market or any other investment vehicle may or may not perform. There are many types of Permanent Life Insurance policies. To name a few: Universal Life Insurance, Whole Life Insurance, Final Expense Whole Life, Variable Universal Life, Indexed Universal Life Insurance.
In addition to the death benefit, cash values are always a component of a permanent life insurance policy. For the policy to remain permanent throughout the life of the insured, the premium will include extra charges over and above what the true cost of insurance would be during the early years of the policy. This is called cash value or savings of the policy. It is a forced savings or investment vehicle attached to the policy that has certain guarantees for the return on the investment performance of that policy. Each policy type will use a different way of calculating performance and return on investment portion of the cash value holdings inside the policy. The name of the policy will tell much about how and what type of performance measures will be used. It is this cash value portion of your policy that allows the policy to continue to pay over time when traditional policies would terminate. The insured may be continuing to pay the same premium in the latter years as they age, but the mortality costs are still going up and need to be satisfied. This is where the cash value of the policy will begin to pay for the increased costs of true insurance. If the cash value has not preformed well there may not be enough cash built up to sustain the policy in the later years. If this should occur, your insurance company will send you a letter increasing your premiums to meet the increased cost of mortality expenses as you age. This is the reason why you want to know what your No Lapse Lifetime Guarantee is for your policy. If you have a current permanent life insurance policy, I would check immediately to find out how many years at current premium levels would your policy be guaranteed? The markets have not preformed that favorably over the last 15 years and you do not want any surprises with your life insurance program.
Other unique features of these types of life insurance products include the ability to borrow funds against accumulated cash values and the ability to skip payments when excess funds are available. This is accomplished through the ability of the policy to borrow funds and make payments from the cash value inside the policy. You will need to pay back these borrowed funds to be able to keep the guarantees of the original policy. If not paid back, the guarantees will be reset to match the remaining available funds. Most Permanent Life Insurance policies have a use it or lose it cash value provision. If you die the policy will only pay the death benefit as outlined in the policy and your savings is no longer yours. Some of the Universal Life products allow this money to be paid out to the beneficiary but you will pay extra for that provision.
Yes, Permanent Life Insurance policy premiums are higher or more expensive than Term Life Insurance. This should not be alarming to anyone who thinks about this on simple terms. If you are purchasing any product that is guaranteed for a lifetime wouldn’t you normally pay a higher premium for that product? If you choose a temporary product, it may work just as well, but only designed to last for a temporary period of time. You would expect to pay less for that temporary product, now wouldn’t you?
With any financial strategy for life everyone should have a game plan. Life insurance should be part of everyone’s financial plan. Ultimately, Life Insurance should be a product that helps you create an immediate estate to care for responsibilities or obligations that you have not met as a result of an early exit from this earth. There is a strategy behind each type of life insurance product but before knowing if a strategy or product may work for you, it is important for you to sit down and write down all of your goals and needs.
Include:
1. How much money will it take to replace my income?
2. How much will estate taxes cost my family?
3. How long do I need coverage? Age of Children, Length of Mortgage?
4. When are my peak years of obligation over? Mortgage, Children, College, Ancillary Debt?
5. What liquid assets do I own? Savings, Stocks, Bonds, Retirement Savings?
6. How much coverage will I need?
7. What is my budget for this life insurance protection?
8. If my budget is tight what are my alternatives?
9. Do I want to leave a family legacy?
10. Final expense insurance. Is this all that I will need?
11. No promises for tomorrow! Insurability is a HUGE factor as we age. Buy as much life insurance as you can afford for the longest period of time.
Look at all your available options. First, you must determine the amount of time that you want to manage your risk of loss of income or asset protection. Then select the product of choice. Term Insurance will be less expensive than Permanent Life Insurance. However, you must be aware that you are only paying the insurance during a selected period of time. Unless protection is used, you must remember that the period of time selected will one day end. If it does end prematurely to your obligations, you will then need to re-qualify based on your health and age paying new rates according to current qualifications. If too many variables are part of your life, look at purchasing a Permanent Life Insurance policy. Be wise when purchasing a Permanent policy. Know what the No Lapse Lifetime Guarantee premium will be before making your final decision to purchase that policy.
Looking at the root words, Life and Insurance, we are given words that are broad in meaning. However, used together and properly defined as a definitive word, we can easily identify more specific types of Life Insurance and their uses. Life insurance is a product that can be defined by answering the questions of what, when, and how? QUESTION: What does life insurance do? ANSWER: It buys replacement income or provides asset protection. QUESTION: When does it perform? ANSWER: Upon the early or untimely death of an individual. QUESTION: How it does work? ANSWER: Through a written and agreed upon contact of known risks available. If all the above is true, we could identify life insurance as: A written contract of known risks that will pay out and replace the income and/or protect the assets of the insured upon their early or untimely death. Wow! That was pretty straight forward and easy to understand. Wasn’t it?
To understand Life Insurance we must also recognize that there are two types or categories of Life Insurance. These types have a name or title that is descriptive of their use. The two types are Term Life Insurance and Permanent Life Insurance. Each has its own place within our risk management for either our family or our business. How you decide to manage those risks will determine the kind of Life Insurance that you should purchase.
Term Life Insurance defines a temporary period of time for a death benefit to be covered. The term, or the period of coverage, is agreed upon at the inception of the policy and will terminate at the end of that known period of time. The most common periods of duration are 10, 15, 20, 25, or 30 year periods. Term Life Insurance should be used to provide coverage for the replacement of income that would have been earned in order to help meet obligations during a set period of time. A Term Life Insurance plan can also be used in estate planning for short term tax related obligations. There are also different types of Term Life Insurance products. There are Annual Renewable Term Life, Declining Term Life, Level Term Life, and Level Term ROP Life, (ROP, acronym for Return of Premium). Each product type has its own advantages for the protection of your family.
Permanent Life Insurance can be defined as permanent throughout the life of the insured individual. Permanent Life Insurance is only permanent in the sense that the policy will not terminate or lapse if certain performance measures are met during the life of the policy. Guaranteed levels of performance are built into the policies to protect the insured. It is always a good idea to ask what the premium would be for a No Lapse Lifetime Guarantee. Projections are not guarantees and you should not be making life insurance decisions based on projections on how the stock market or any other investment vehicle may or may not perform. There are many types of Permanent Life Insurance policies. To name a few: Universal Life Insurance, Whole Life Insurance, Final Expense Whole Life, Variable Universal Life, Indexed Universal Life Insurance.
In addition to the death benefit, cash values are always a component of a permanent life insurance policy. For the policy to remain permanent throughout the life of the insured, the premium will include extra charges over and above what the true cost of insurance would be during the early years of the policy. This is called cash value or savings of the policy. It is a forced savings or investment vehicle attached to the policy that has certain guarantees for the return on the investment performance of that policy. Each policy type will use a different way of calculating performance and return on investment portion of the cash value holdings inside the policy. The name of the policy will tell much about how and what type of performance measures will be used. It is this cash value portion of your policy that allows the policy to continue to pay over time when traditional policies would terminate. The insured may be continuing to pay the same premium in the latter years as they age, but the mortality costs are still going up and need to be satisfied. This is where the cash value of the policy will begin to pay for the increased costs of true insurance. If the cash value has not preformed well there may not be enough cash built up to sustain the policy in the later years. If this should occur, your insurance company will send you a letter increasing your premiums to meet the increased cost of mortality expenses as you age. This is the reason why you want to know what your No Lapse Lifetime Guarantee is for your policy. If you have a current permanent life insurance policy, I would check immediately to find out how many years at current premium levels would your policy be guaranteed? The markets have not preformed that favorably over the last 15 years and you do not want any surprises with your life insurance program.
Other unique features of these types of life insurance products include the ability to borrow funds against accumulated cash values and the ability to skip payments when excess funds are available. This is accomplished through the ability of the policy to borrow funds and make payments from the cash value inside the policy. You will need to pay back these borrowed funds to be able to keep the guarantees of the original policy. If not paid back, the guarantees will be reset to match the remaining available funds. Most Permanent Life Insurance policies have a use it or lose it cash value provision. If you die the policy will only pay the death benefit as outlined in the policy and your savings is no longer yours. Some of the Universal Life products allow this money to be paid out to the beneficiary but you will pay extra for that provision.
Yes, Permanent Life Insurance policy premiums are higher or more expensive than Term Life Insurance. This should not be alarming to anyone who thinks about this on simple terms. If you are purchasing any product that is guaranteed for a lifetime wouldn’t you normally pay a higher premium for that product? If you choose a temporary product, it may work just as well, but only designed to last for a temporary period of time. You would expect to pay less for that temporary product, now wouldn’t you?
With any financial strategy for life everyone should have a game plan. Life insurance should be part of everyone’s financial plan. Ultimately, Life Insurance should be a product that helps you create an immediate estate to care for responsibilities or obligations that you have not met as a result of an early exit from this earth. There is a strategy behind each type of life insurance product but before knowing if a strategy or product may work for you, it is important for you to sit down and write down all of your goals and needs.
Include:
1. How much money will it take to replace my income?
2. How much will estate taxes cost my family?
3. How long do I need coverage? Age of Children, Length of Mortgage?
4. When are my peak years of obligation over? Mortgage, Children, College, Ancillary Debt?
5. What liquid assets do I own? Savings, Stocks, Bonds, Retirement Savings?
6. How much coverage will I need?
7. What is my budget for this life insurance protection?
8. If my budget is tight what are my alternatives?
9. Do I want to leave a family legacy?
10. Final expense insurance. Is this all that I will need?
11. No promises for tomorrow! Insurability is a HUGE factor as we age. Buy as much life insurance as you can afford for the longest period of time.
Look at all your available options. First, you must determine the amount of time that you want to manage your risk of loss of income or asset protection. Then select the product of choice. Term Insurance will be less expensive than Permanent Life Insurance. However, you must be aware that you are only paying the insurance during a selected period of time. Unless protection is used, you must remember that the period of time selected will one day end. If it does end prematurely to your obligations, you will then need to re-qualify based on your health and age paying new rates according to current qualifications. If too many variables are part of your life, look at purchasing a Permanent Life Insurance policy. Be wise when purchasing a Permanent policy. Know what the No Lapse Lifetime Guarantee premium will be before making your final decision to purchase that policy.
