As the name implies, term insurance provides protection for a specific period of time and generally pays a benefit only if you die during the "term". Term periods typically range from one year to 30 years, with 20 years being the most common term.
One of the biggest advantages of term insurance is its lower initial cost in comparison to permanent insurance. Why is it cheaper when initially purchased? Because with term insurance, you're generally just paying for the death benefit, the lump sum payment your beneficiaries will receive if you die during the term of the policy. With most permanent policies, your premiums help fund the death benefit and can accumulate cash value.
Term insurance is often a good choice for people in their family-formation years, especially if they're on a tight budget, because it allows them to buy high levels of coverage when the need for protection is often greatest. Term insurance is also a good option for covering needs that will disappear in time. For instance, if paying for college is a major financial concern but you're pretty sure that you won't need life insurance coverage after the kids graduate, then it might make sense to buy a term policy that'll get you through the college years.
When the Term Ends
But what happens if you buy a term policy only to realize at the end of the term that you still have a need for life insurance? Well, it's sort of a good news, bad news story. The good news is that many policies will give you the option to renew your policy when you reach the end of the term. The bad news is that you'll probably face much higher costs since age is one of key factors used to determine life insurance premiums. To renew the policy, you also may have to present evidence of insurability (that's insurance jargon meaning, "take another medical exam and answer a new round of questions about your lifestyle, health status and family health history"). If you're still a fine specimen with healthy living habits, you might requalify at a reasonable rate. But if your health has deteriorated, you may find that it's too expensive to renew your policy or you may not even requalify.
So if you're considering a term policy, make sure you carefully consider how long you'll need the coverage. If you're pretty sure that your needs are temporary, then term insurance is probably the right choice for you. But if you think there's a possibility that you might need the coverage for a long time, then remember that if you want to renew your term policy after it expires or buy a new term policy at that time, your age, health status or other factors may make coverage very expensive.
To better understand term insurance, consider this analogy. When you purchase term insurance, it's sort of like renting a house. When you rent, you get the full and immediate use of the house and all that goes with it, but only for as long as you continue paying rent. As soon as your lease expires, you must leave. Even if you rented the house for 30 years, you have no "equity", or value, that belongs to you.
Key Policy Provisions
When considering a term purchase, one thing to keep in mind is that not all term policies are the same. Some may include certain provisions as standard features, while others may require you to pay extra to add these features as "riders" to your policy. So if you're comparing term policies, remember that price is not the only factor to consider. Ask your agent about provisions such as:
- Accelerated death benefits - allows a terminally ill person to collect a significant portion of his or her policy's death benefit while that person is still alive.
- Disability waiver of premium - waives premiums when a policy owner suffers a long-term disability, typically one lasting six months or longer.
- Accidental death benefits - doubles or triples the benefit in the case of death by accidental means.
Another provision that is very important is something called convertibility. Some insurance contracts only allow "conversion" in the first few years of the policy, while others allow it at any point during the term. This valuable feature allows you to convert your term policy to a permanent policy (e.g., whole life insurance) without submitting evidence of insurability. Being able to convert to a permanent policy is a great option to have in the event that circumstances in your life change such as failing health or maybe just the realization that coverage is needed for a longer period of time than you originally anticipated. That's why when purchasing a term policy, it's never a bad idea to find out what kind of permanent policies are offered by the company you are considering. Some companies may only have strong term insurance offerings, while others may have very competitive products in both categories.
Permanent insurance provides lifelong protection, and the ability to accumulate cash value on a tax-deferred basis. Unlike term insurance, a permanent insurance policy will remain in force for as long as you continue to pay your premiums. Because these policies are designed and priced for you to keep over a long period of time, this may be the wrong type of insurance for you if you don't have a long-term need for life insurance coverage.
Why would someone need coverage for an extended period of time? Because contrary to what a lot of people think, the need for life insurance often persists long after the kids have graduated college or the mortgage has been paid off. If you died the day after your youngest child graduated from college, your spouse would still be faced with daily living expenses. And what if your spouse outlives you by 10, 20 or even 30 years, which is certainly possible today. Would your financial plan, without life insurance, enable your spouse to maintain the lifestyle you worked so hard to achieve? And would you be able to pass on something to your children or grandchildren?
Cash Value - A Key Feature
Another key characteristic of permanent insurance is a feature known as cash value or cash-surrender value. In fact, permanent insurance is often referred to as cash-value insurance because these types of policies can build cash value over time, as well as provide a death benefit to your beneficiaries.
Cash values, which accumulate on a tax-deferred basis just like assets in most retirement and tuition savings plans, can be used in the future for any purpose you wish. If you like, you can borrow cash value for a down payment on a home, to help pay for your children's education or to provide income for your retirement. When you borrow money from a permanent insurance policy, you're using the policy's cash value as collateral and the borrowing rates tend to be relatively low. And unlike loans from most financial institutions, the loan is not dependent on credit checks or other restrictions. You ultimately must repay any loan with interest or your beneficiaries will receive a reduced death benefit and cash-surrender value.
If you need or want to stop paying premiums, you can use the cash value to continue your current insurance protection for a specified time or to provide a lesser amount of death benefit protection covering you for your lifetime. If you decide to stop paying premiums and surrender your policy, the guaranteed policy values are yours. Just know that if you surrender your policy in the early years, there may be little or no cash value.
Cash Value vs. Face Amount
With all types of permanent policies, the cash value of a policy is different from the policy's face amount. The face amount is the money that will be paid at death or policy maturity (most permanent policies typically "mature" around age 100). Cash value is the amount available if you surrender a policy before its maturity or your death. Moreover, the cash value may be affected by your insurance company's financial results or experience, which can be influenced by mortality rates, expenses, and investment earnings.
"Permanent insurance" is really a catchall phrase for a wide variety of life insurance products that contain the cash-value feature. Within this class of life insurance, there are a multitude of different products. Here we list the most common ones.
Whole Life or Ordinary Life
If you're the kind of person who likes predictability over time, Whole Life insurance might be right for you. It provides you with the certainty of a guaranteed amount of death benefit and a guaranteed rate of return on your cash values. And you'll have a level premium that is guaranteed to never increase for life.
Another valuable benefit of a participating Whole Life policy is the opportunity to earn dividends. While your policy's guarantees provide you with a minimum death benefit and cash value, dividends give you the opportunity to receive an enhanced death benefit and cash value growth. Dividends are a way for the company to share part of its favorable results with policyholders. When you purchase a participating policy, it is expected that you will receive dividends after the second policy year - but they are not guaranteed. Dividends, if left in the policy, can provide an offset (and more) to the eroding effects of inflation on your coverage amount.
Variable Life insurance is offered via a prospectus and provides death benefits and cash values that vary with the performance of a portfolio of underlying investment options. You can allocate your premiums among a variety of investment options offering different degrees of risk and reward: stocks, bonds, combinations of both, or a fixed account that guarantees interest and principal. This type of insurance is for people who are willing to assume investment risk to try to achieve greater returns. With Variable Life you're shifting much of the investment risk from the insurance company to yourself. Good investment performance would provide the potential for higher cash values and ultimate death benefits. If the specified investments perform poorly, cash values and death benefits would drop accordingly.
Unlike Whole Life and Variable Life where you pay fixed premiums, Universal Life offers adjustable premiums that give you the option to make higher premium payments when you have extra cash on hand or lower ones when money is tight.
Universal Life allows you, after your initial payment, to pay premiums at any time, in virtually any amount, subject to certain minimums and maximums. You also can reduce or increase the death benefit more easily than under a traditional Whole Life policy.
Most Universal Life policies will also provide a guaranteed rate of return on your cash values, with one important exception. It is possible that you will not accumulate any cash value if any, or all, of the following circumstances occur: administrative expenses increase, mortality assumptions are changed, the insurance company's investment portfolio underperforms, premium payments are insufficient.
In recent years, there's been considerable interest in what'’s commonly referred to as Universal Life with Secondary Guarantees (also known as a "No-Lapse Guarantee"). With an ordinary Universal Life product, the policy could lapse under certain circumstances (e.g., interest rates fall below projections, insurance costs or administrative expenses rise, etc). When you buy a policy with a "secondary guarantee", you're guaranteed that the policy won't lapse even if the above factors come to pass.
One of the most attractive things about Universal Life policies with Secondary Guarantees is that they provide lifelong coverage at rates that can be considerably lower than other forms of permanent insurance. That's one of the main reasons why these policies have become so popular for estate planning purposes. If you have a federal estate tax liability (in 2008, estates valued at over $2 million are taxed), your main concern is liquidity at death. When you die, you don't want your heirs to have to hastily sell off assets in order to pay estate taxes. With a Universal Life policy with Secondary Guarantees, the death benefit is guaranteed for life and you have the flexibility of adjusting your premiums, a valuable feature since estate tax rates and exclusion amounts keep changing from year to year.
Variable Universal Life
Variable Universal Life insurance is a flexible premium, permanent life insurance policy that allows you to have premium dollars allocated to a variety of investment options, offering varying degrees of risk and reward. These policies are a good choice for people seeking maximum flexibility. Should your insurance needs change over time, Variable Universal Life usually provides the flexibility to increase or decrease your amount of coverage. You can also make a lump-sum payment to increase the policy's cash value. (The maximum lump--sum payment is subject to IRS limitations.) And, should an emergency arise and you are short on cash, you may be able to skip a scheduled payment and let the accumulated cash value cover the policy's expenses. Keep in mind that the cost of insurance and administrative expenses are still incurred. As your insurance needs change, it is quite probable so will your long-term investment goals and risk-tolerance levels. With Variable Universal Life, you have flexibility to transfer funds between the investment divisions, tax free. So, you have the freedom to make decisions based on your needs and not on the tax ramifications.
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I would like to thank Johnny Watts and Donnie Bost for helping me with my life insurance. They helped me find reasonable priced insurance for my age. They kept in contact with me for several weeks while I made my choice. Thank You.
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Johnny and Donnie were great working with me and my schedule to determine the most effective cost and approach to my life insurance needs. I would highly recommend them to assist others as they are most concerned with tailoring the product to your needs. Thank you.
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I was very pleased and satisfied with my experience with Johnny Watts. As skeptical and unsure as I was to what I was getting myself into with Life Insurance, I knew I needed to do this to protect my family and had been putting it off for years, he had helped me every step of the way. Johnny was able to answer all my millions of questions and able to make me feel comfortable to make that step forward. He was able to help me get a great rate affordable for my family and put me much at ease after some recent incidents that came about in my life. I would recommend Johnny Watts Agency to any of my friends and family and I would definitely use his services in the future when I am seeking some again. Thanks for all your help and gratitude.
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Buying Life Insurance in today’s market can be very confusing, I found that working with Johnny Watts made me feel confident that I purchased the right coverage for my family at a price I could afford.
My wife and I would recommend Johnny Watts and Donnie Bost to anyone that needs life insurance. They will work very hard to find you the very best insurance for the lowest possible cost. They know what they are doing. May God pour out His blessing on you. Thanks again for your help.
Johnny Watts and Donnie Bost started out as our insurance agents, but quickly became our friends. Their knowledge and commitment are unsurpassed. Thank you for making the dreaded task of finding life insurance easy and painless.
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Johnny, Just wanted to tell you how great you are for helping me with my life insurane. The world would be a much better place if people could conduct business as you guys do. Thanks again. So many have left God out of their professional life and guess what - it always has bad results. You are a great persn and friend. I pray many blessings for you and your lovely family.
hanks for all your help in finding the right policy and help through the process. And being just a phone call away!
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Thank you Johnny Watts and Donnie Bost for helping me get my life insurance in place. At first, I was not sure about getting a quote from an internet search, but after talking with you, both of you put me at ease and were patient with me while we looked at several options. Now, I have the peace of mind knowing that I have my life insurance. And I have two new friends/agents that will be there when I need them.
I had a very special need and Johnny Watts was working for us and with us during every step of my insurance process and in such a personal way that it seems he is a part of our family. Thanks, Johnny, for your guidance and patience in this matter.
Johnny Watts was a great help in finding a policy that I could work with and afford. He was never pushy and always very professional. Thanks Johnny for your help.
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Johnny Watts has been a great guy. He has helped me plenty of times with great customer service and knowledge. Thank you for providing me with all my life insurance needs.
Johnny Watts earned my trust and confidence the very first time that I talked with him on the phone. Talking with Johnny is like talking to your best friend . He cares about people and has helped me and a lot of other people by finding the right insurance for each individual's needs.
Johnny, thanks for keeping check on us. When you cross my mind I always say a prayer for you and the family, and Donnie Bost too. THANKS so much for being so up-front in our communication. We are happy with the life policy you suggested. I believe it's the best available. Thanks again for your friendship and let's remember each other in our PRAYERS. God Bless You My Friend.
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