life Insurance Article

Picking a Permanent Life Insurance Policy

The information and lingo about life insurance in general — particularly permanent life insurance products — can make it seem as though there should be a Rosetta Stone for it. If your eyes glaze over when trying to understand it, don’t feel bad — you’re definitely not alone, as it often seems like a foreign language to many people. 

Becoming well-versed in the different types of permanent life insurance products available is the first hurdle to cross, and then there’s a second one — knowing how to effectively compare them. You won’t be able to do either quickly, but slow and steady wins the race, and the award will be greater for that. After you’ve jumped those hurdles, you’ll probably feel like you deserve a gold medal. There’s an even greater reward though — knowing that after you pass, your loved ones will get some “gold” too and be protected. That deserves serious accolades, because there’s nothing more honorable than looking out for loved ones.

The ins and outs of life insurance can be complicated, but with simple tips and information, life insurance comparison shopping will be easier and a little more black and white without huge grey areas. If you’re ready to do a thorough, effective comparison, here are important tips and information to remember.

Important Life Insurance Terms

Before you jump into comparison shopping, these are some terms you’ll hear regardless of which type of policy you buy, so definitely “learn the language” first.

  • Beneficiary: The person(s) who receive the policy’s death benefits
  • Owner: The person who controls the policy
  • Purchase options: Add-ons allowing the insured to purchase additional coverage
  • Waiver of premium: Suspends premiums in case of total disability

3 Is the Magic Number

There are three main types of permanent life insurance: whole life, universal life, and variable life. When you begin to compare permanent life insurance offerings, you’ll find three main components present in each policy type.

  • Mortality Costs – The policy’s premiums to be paid, determined by the face amount of the policy and estimate of when the policyholder will die.
  • Expense Charges – Fees that help fund the insurance company and commissions
  • Cash Value – The amount of income life insurance policies generate or have generated

Variable Life

Variable life insurance is less common and the most risky investment. Your premium is invested in options of your choice, and death benefits and cash value depend on the performance of investments made. Since those reasons present more of a gamble, if you’re interested in securing death benefits for loved ones, a variable policy may not be the best permanent life insurance choice for you.

Variable products are one life insurance option demonstrating how essential it is to learn how your choices will affect you long term. If you like to be in control, and have ruled out variable life insurance, only two policies are left in the ring — universal and whole life insurance. Both types provide life insurance, but because of the available components of each, you have to set expectations for life insurance policies to accurately compare.

Whole Life Insurance

Whole life insurance policies have a fixed rate in all three policy components. If you prefer a fixed monthly rate, standard expense charges, and a guaranteed rate of return on your investment, whole life is going to be the best permanent life insurance for you. Generally, that’s because the insurer assumes all risk.

However, even though whole life sounds like a safer route because rates are guaranteed, very little of your premium is invested (reducing the “gambling aspect” which can also mean losing out) and you cannot contribute more.

Why would you want to contribute more? Because bigger investments mean bigger dividend payments. You can use dividend income to pay any premiums, buy extra insurance, or re-invest.

You should be aware that your investment would only grow at a guaranteed rate of return, so regardless of market performance, you’re locked into a growth percentage. This can be good or bad. If you’re looking for a set premium because of a strict budget or don’t trust yourself to invest wisely though, since you can control investments with variable and universal life meaning you should know what you’re doing when investing, whole life may be your best permanent life insurance option.

Universal Life

If you need need life insurance and a strong investment tool, universal life is what you need, not whole life insurance. If you want more flexibility and control over your policy, consider universal life insurance. Your mortality costs (aka premiums) can vary based on insurer or changes you make, and there’s a cap on the maximum premium limit. As for cash value, it reflects market activity but will still have a minimum rate of gain.

Universal premiums won’t fluctuate at an unreasonable rate: You’ll pay a set amount for a certain time period (not indefinitely though) and the beauty is that you can contribute more or less to the policy’s investment aspects at any time.

The other beauty is that you can choose how it’s invested. If you’re a savvy spender, your premium can be paid with the dividends earned from your investment, so your out-of-pocket cost can eventually disappear. At that point, you have tax-free growth happening with minimal effort. The 4th rule of ecology is that there’s no such thing as a free lunch. The 5th rule those scientists forgot to add is that “tax-free” is a rarity too.

What to Look for When You Decide

Universal Life Insurance Policies

If you decide on a universal life insurance policy, focus on the three main components: mortality costs, expense charges, and cash value.

With universal life insurance policies, focus on options offering flexibility. Ideally, you want low mortality costs combined with low expense charges and a high yield on cash value. Ask how taxes will affect any account transactions, if minimum premium limits can be suspended, and average investment returns.

As always, read the fine print. After the work you’ve done so far, that won’t be as bad as it sounds. Additionally, check the company’s rating at non-partisan resources like AM Best.

Whole Life Insurance Policies

If you’ve decided on whole life insurance, you’re likely craving the guarantees whole life products offer, so make sure they’re worth your while. Compare premiums of different companies with offered amount of insurance as well as potential dividends. Similar to seeking a universal policy, you want low mortality costs, low expense charges, and a reasonable rate of return on investments.

However, this is especially true for whole life as you will not be able to change the rates. Examine policy time limits and any other restrictions placed on the policy. Additionally, review how premium amounts paid will contribute to the policy’s current cash value, and ensure the company has a strong, good credit standing.

Doing It Your Way

A lot of people hear one classic life insurance battle their entire life — term vs. whole. However, opting for permanent life policies find themselves wrestling with the debate of whole or universal life insurance. Despite what some financial advisers and insurance agents say, there’s not one general rule as to what life insurance product you should or shouldn’t buy. It’s up to the individual, and “Unofficial Desiree Insurance Rule #3” is to buy insurance coverage that’s right for you, and never let anyone else make up your mind about what fits your goals and needs. In the long run, you’re paying for it, and perhaps more importantly, your loved ones are usually the ones who will win from smart life insurance choices you make. That’s when the true awards ceremony begins.

Follow Desiree on Twitter @DesireeBaughman

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