Life insurance is a critical tool for protecting your loved ones, but with so many options available, choosing the right policy, level of coverage, and advisor can feel overwhelming. Understanding the different types of life insurance can help raise your confidence, allowing you to make an informed decision that aligns with your family’s needs and financial goals. So….let’s break down the most common life insurance policies, their benefits, and potential drawbacks.
TERM LIFE INSURANCE: AFFORDABLE AND STRAIGHTFORWARD
Term life insurance is one of the most popular and cost-effective options. It provides coverage for a specific period—typically 10, 15, 25, or 30 years. If you pass away during the term, your beneficiary receives a tax-free death benefit. However, if the term expires, you must renew coverage based on your new age and health status.
There are different variations of term life insurance:
- Level Term: The premium and death benefit remain fixed for the entire term.
- Annual Renewable Term: The death benefit stays the same, but premiums increase each year.
- Decreasing Term: The death benefit gradually decreases while premiums remain unchanged—often used to cover mortgage or loan repayments.
WHOLE LIFE INSURANCE: LIFETIME PROTECTION WITH FIXED COSTS
Whole life insurance provides lifelong coverage, ensuring that your beneficiaries receive a guaranteed death benefit regardless of when you pass away. The premiums remain fixed, making it easier to budget.
However, whole life policies tend to be significantly more expensive than term life insurance. The costs are higher because the insurer guarantees a payout, as opposed to only for a specified “term.” If purchased later in life, whole life insurance premiums can be prohibitively expensive, making term or alternative policies a more attractive option for some individuals.
UNIVERSAL LIFE INSURANCE: FLEXIBILITY AND CASH VALUE GROWTH
Universal life insurance offers permanent coverage with a built-in cash value component. A portion of your premium is allocated to an interest-earning cash account, which grows tax-deferred. This accumulated cash can be used to cover premium payments, supplement retirement income, or address other financial needs.
While universal life insurance provides flexibility, its premiums can fluctuate based on interest rates. If market rates drop significantly, you may need to pay higher premiums to maintain coverage. This is the type of insurance where you may want to do a bit of homework and research a few different options from a few different providers, so that you ensure that your choosing the right plan for your family. As will discuss in a few moments, finding a trustworthy advisor to guide you through this process will be invaluable.
VARIABLE UNIVERSAL LIFE INSURANCE: INVESTMENT OPPORTUNITIES WITH RISK
Variable universal life insurance functions similarly to universal life but allows you to invest the cash value portion in various investment options, potentially yielding higher returns. While this offers greater control over your policy’s growth, it also introduces market risk. Poor investment performance may require you to increase premiums to keep the policy active.
Additionally, variable policies often come with higher management fees, making it essential to weigh the costs against potential benefits. As we just discussed, choosing the right advisor and policy will be paramount.
MAKE AN INFORMED DECISION WITH EXPERT GUIDANCE
Selecting the right life insurance policy is a major financial decision, and it’s easy to feel pressured by insurance agents who may prioritize commissions over your best interests. That’s why it’s crucial to get unbiased guidance from professionals who understand how life insurance fits into your overall wealth strategy.
I’d recommend that you interview several advisors and ask a lot of questions seeking information about the policies that they offer, their background, and the providers they use. After a few interviews, you should be more informed and in a better position to assess each person’s character and the products they offer. That way, you’ll be better positioned to ensure that you choose a trustworthy advisor, that you feel has your family’s long-term best interest in mind, as opposed to their bottom-line because these are commission-based products.
Once you’ve chosen the right life insurance policy, it’s just as important to ensure it’s set up correctly to fully protect your loved ones. From naming beneficiaries to structuring your policy within your estate plan, proper setup can prevent costly mistakes and ensure your family receives the benefits as intended. Learn how to structure your policy the right way by reading our guide: Life Insurance—An Attorney’s Guide to Setting Up Your Life Insurance Policy the Right Way.
At Family Wealth & Legacy Legal Solutions (FWLLS), we work alongside trusted financial professionals who can help you assess your options and choose the right life insurance policy for your unique situation.
Schedule a Family Wealth Strategy Session today at FWLLS.com to ensure your financial future is secure and your loved ones are protected—no matter what life brings.
For additional insights on choosing the right life insurance policy, check out this resource from the National Association of Insurance Commissioners: www.naic.org.