What are the main types of life insurance? |
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Answer:
Recently, I was talking to a Texas woman who happened “Until I die…” I stepped back and settled in for a heart to heart. Not a formulaic “needs analysis” discussion—but immediately I recognized the need to explain main life insurance options on a basic level. She would benefit more, I knew, from conversation... educational conversation with healthy doses of empathy. I quickly found out that she already had some coverage in place. I was encouraged at first—admiring her past initiative and level of responsibility. Then she told me what it was… “Accidental Death and Dismemberment…” she said. My educator hat firmly glued to my head, I knew this was going to be a long talk. So rather than give a play by play of the entire conversation, I’ll provide some basic descriptions of the main types of life insurance and then let you know what I recommended for “Teresa” in Texas: * Accidental Death and Dismemberment Insurance (AD&D) : I will limit this description to the stand-alone version. Sometimes this type of life insurance coverage can be purchased as a rider attached to a term life insurance plan or permanent life insurance policy. It is when it is purchased as a stand alone plan that I get concerned. When someone purchases this type of life insurance as their primary coverage, it usually indicates a poor understanding of their options and that they jumped at the first sales pitch in a flyer received from their bank. Banks are notorious for partnering with insurance companies to offer this type of coverage. Because it does not usually require a medical exam, it’s quick to put in place, and means a speedy kickback for the bank, they push it shamelessly. It works like this: You die in an accident (not for health related reasons) and your beneficiaries get paid the face amount (death benefit) of the policy. It’s that simple really… While in the top 10 leading causes of death, “unintentional injuries” or accidents (at #5) is not an insurance company’s top concern when deciding whether or not to insure someone. People are more likely to die from heart disease or cancer. The “dismemberment” part of this coverage works fairly simply as well… lose a limb… get paid. A typical reimbursement might be perhaps $7,500 for the loss of a hand or an arm. Morbid reality… the insurance company decides how much your arm is worth. As you can tell, I’m not a fan of this type of coverage—unless it’s the only type of coverage for which someone can qualify. Teresa in Texas is not well served by Accidental Death Life Insurance. She’s healthy, has a defined goal to leave something for her children, and she leads a safe, stable lifestyle as a retired teacher. Teresa needs a new plan… * Term Life Insurance : This is by far the most recommended form of life insurance… and for good reason. Term life insurance allows you to purchase a lot of coverage for very little money. It also pays your beneficiaries with virtually no regard to how you die. The premiums, in most cases, remain level as does the benefit. So it’s inexpensive, comprehensive, and you always know what to expect. So what’s not to like? In short, it’s temporary… and if you outlive it… you have to start all over. So Teresa in Texas can get a term plan, sure. But chances are very good that she’ll live beyond age 70. Since term life insurance from most companies is only issued up to a maximum of age 70, she’ll find herself out of options when a term plan expires—especially if there is any change in her health. So even if she buys a 10 year term life insurance (Term life is generally found in 5 year increments of coverage: 10 year term life insurance, 15 year term life insurance, 20 year term life insurance, 25 year term life insurance, and 30 year term life insurance) plan and has ample opportunity to reapply for another… if there is an adverse change in her health, she could be declined for coverage or an approval could produce rates that are prohibitively expensive. So if she buys a 10 year plan now and another at age 68… she’ll be 78 years old and out of options when her next plan expires. By the way… the older you get, the slimmer your term options become. Ten year term life or 15 year term life insurance will be her last remaining term options at age 68. So while term life is the right way to go when you’re young, purchasing coverage when you’re older require a bit more thought. The well known financial gurus like Dave Ramsey and Suse Orman preach the value of term and why everyone should focus on this type of coverage and this type of coverage only. While I agree with this most of the time, I believe that adhering to this philosophy as an absolute does more harm than good. Teresa is an ideal candidate for a permanent life insurance policy like Universal Life Insurance or Whole Life Insurance and I’ll explain why in the next section. There are other aspects of term life insurance I would like to discuss like, convertibility, renewability, and Return of Premium Term … but I’ll reserve these topics for future discussions. * Permanent Life Insurance (Whole Life Insurance and Universal Life Insurance ): This is what Teresa ultimately bought—Universal Life Insurance. It was the smartest choice for her given her very clear desire to be assured of leaving something behind for her children. Universal Life Insurance is a flexible premium, adjustable benefit life insurance plan that is designed to last until a person dies. (Whole life insurance is less flexible, and also less cost effective. It has become less prominent over the years as a result. Like Universal Life insurance, it’s designed to be permanent.) Teresa will spend a little over $60 per month for life time protection that will pay her beneficiaries $50,000 if she dies for nearly any reason. It also gradually builds in cash value at a current non-guaranteed interest rate of almost 5%. It’s noteworthy to point out that in my discussion with Teresa—I barely mentioned the cash value. I bristle when life insurance agents hawk their wares on the basis that their plans will make the policy holder money. In my view, this overstates the purpose of life insurance and does customers a disservice. The best thing about permanent life insurance coverage is that it’s permanent. Teresa is a happy camper. She clearly stated that her goal was not to have to worry about whether or not she’ll be able to leave something behind for her kids. It was not her intent to make them rich… but she did want to ensure they were not burdened with her final expenses and burial costs when she died and that they perhaps would have a little something left over. She now has a better understanding of what is available to her as she heads into her golden years and she can feel comfortable that she did the right thing. Trackback(0)
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