Around this time of year we often joke about (and even dress up like) scary things – witches, zombies, monsters, oh my! But this is a good time to also talk seriously about things that really matter when it comes to death and dying.What will happen to your family if you or your spouse were to die? Would they be taken care of financially or would they suddenly be without any income?
Would they be able to afford to stay in their home? These aren’t fun things to think about, but we care about our families and want to ensure they will be OK so it’s time to learn about life insurance.
Did you know that life insurance originated with monks? They wanted a way to take care of their families and estates if something happened, so they would pool some money together to cover expenses when one passed away.
Today we have many different types of insurance – public, private, mutual insurers – but they all have the same basic concept: you put money in, the funds are invested by the company to generate returns, and this pool of money + returns is used to cover claims.
In the case of life insurance, this will payout a sum of money to the beneficiary if the covered person were to pass away. Many people worry that life insurance will be too expensive, so they don’t even look into it.
While some types of life insurance can be quite expensive, there are actually many different options that can be customized to every budget and situation. Most people are willing to sacrifice a little bit now to ensure that their family will be taken care of.
Now that you understand the basics of how life insurance works, let’s look into the main types that are available.
Non-Variable Policies: These policies will have either a benefit amount or a premium amount that remains static.
- Annual Renewable Term (ART) Policies: This is a policy that is “renewed” every year. Essentially it has a fixed duration like the insured’s age of 80. As long as premiums are paid and the company is still in good financial standing, the policy is renewed.
They will often start out very low cost and affordable for younger individuals in good health. As time goes on, the premium price might increase annually as the covered individual ages. These policies might be held for short duration under 20 years and converted to a whole life policy.
If someone is sick, they may be willing to hold onto ART policies longer because they wouldn’t qualify for a new plan.
- Level Term Policies: Similar to ART, these policies have an end date. However, instead of every year it is at a set point in the future. For example, you might buy a 30-year level term policy for $30/month. This means that you would pay $30 every month for 30 years, at which point the policy would end.
If you happened to pass away during the 30-year time period, however, the policy would pay out the benefit amount to your beneficiary.
The price you pay depends on several factors such as your age and health when you apply for the policy as well as the benefit amount you would like to select.
- Whole/Permanent Policies: You might have heard people like Dave Ramsey or Suze Orman advise against this type of insurance. Why? Well, with a whole life or permanent life insurance policy, you pay more for a policy that doesn’t have a short term end date like a term policy does. Instead of $30 a month, you might pay $100 a month for the same benefit until you’re 65 or 90.
However, the death benefit won’t disappear after 30 years. Similar to owning a home, you are paying into your policy over a period of time, and when you have paid enough, then you own it and any cash value it has accumulated.
Now Mr. Ramsey or Ms. Orman might suggest that instead of paying $100 for this policy, you should pay $30 for the term policy and invest the difference. This is a great idea for those who are financially responsible and will carry through with investing! For those who might not invest the difference or for those who do not want an end date on their policy, this insurance plan can be a great option.
Variable Policies: These policies are typically tied to market returns and might not require a set benefit or premium. You might pay the same amount every month, and if the market does well, your plan might have high returns.
In a poor market, however, the returns could be low and might even require you to pay extra to ensure you have sufficient funds. For someone who would like to use an insurance policy as an investment vehicle, this could be an option.
There are many different types of life insurance policies, and they don’t have to be scary! Your financial adviser is ready to answer any questions you may have and help you pick the best plan for yourself and your family.
Hit us up if you have questions!