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A variety of variables make insurance anything but everlasting

Life insurance can be a more complex financial planning topic than most people think.  At a high level, there are two main policy choices, term or permanent.  When you take a closer look, the picture becomes a bit more convoluted.  Let’s take a look at these two options and compare their differences, starting with term insurance.

When it comes to term insurance you have a few options.  First, you have a level term policy, which means that the premium you are being charged from day one is fixed for the specific timeframe you have chosen, usually 10, 20, or 30 years.  This type of policy is guaranteed to not increase in premium cost or to cancel on you, no matter your age or how your health may change, until that term expires.  The insurance company will pay a death benefit to your designated beneficiary so long as you continue pay the premiums.  This type of policy is typically the least expensive since the insurance company expects you to outlive the term of the policy.  For this reason, term insurance is usually the most appropriate option for clients looking to meet the needs of their family in the event of a premature death, and it’s what we recommend to our clients in the overwhelming majority of those circumstances.  Once the term of the policy runs out, some policies have the option for the policyholder to continue their coverage, with the caveat that the insured will now pay an annual premium that is based on the cost of insurance for their current age.  This is usually a substantial increase from what the policyholder has been paying all these years and understandably so; the chance of passing away – and thus the insurance company having to pay – are statistically much greater as you age.  To avoid these dramatic increases, it’s important to select an initial term that matches the number of years you will need coverage until you are financially independent from an insurance perspective (i.e.: the kids are through college, the house is paid for, etc.)

Another type of term insurance policy that is prevalent is a yearly renewable term policy.  This type of policy has a premium that starts out cheaper than that of a level term policy, but each year when the policy renews, the premium is subject to increases based upon your age.  Depending on how long this type of policy is kept, it can end up being much more expensive than a level term policy in the long run.  Some years, the change in premium can be dramatic, especially if you purchased the policy later in life.

Often, the best use for a yearly renewable policy is for someone that only plans to keep it for a few years because when compared to a level term policy, the premiums in the first few years can be much less.  It may be that the policy is only needed for a short time until it is converted to a form of “permanent” life insurance, or it may be that life insurance is just not needed any longer; however, there will come a point in time in the life of a yearly renewable policy, that the total premium payments would have been less with the level term policy.  For this reason, it’s important to determine how long you anticipate needing life insurance coverage, so you can purchase the policy that offers the lowest cost for the amount of coverage you need.

This is where the life insurance conversation starts to get a bit more complex. If your life insurance isn’t a term policy then it must be permanent, right? Well, it’s not that simple.  There are various life insurance policies that fall within the category of permanent insurance, but for the purposes of this article, we will look at the three most common types.

First, let’s look at whole life policies. A whole life policy, in its purest form, is a guaranteed policy that will pay a death benefit to a beneficiary so long as you pay the premiums. Based on age, gender, and health history, a life insurance actuary prices out what it should cost to insure a particular person for their anticipated life expectancy.  A whole life policy is the most expensive of the permanent policies. The main reason for this is a whole life policy is