The Pros And Cons Of Each Type Of Personal Life Insurance Policy
Term Life Insurance
Term life is the most basic life insurance coverage you can buy. Still, there are several different ways to purchase this insurance – each with its own advantages and disadvantages.
Annual Renewable Term (ART): This type of policy provides one year of guaranteed death benefit coverage. Each year, the policy must be renewed and your policy premiums increase. Some policies will “auto-renew” while others will not.
The advantage of an ART policy is that your premiums may be lower in the early years of the policy when compared to other types of life insurance. However, policy premiums are guaranteed to increase every year, and you may find that this policy becomes very expensive the longer you hold it.
Level Term: Level term takes an ART policy and levels out the premium payments so you can be sure of your total insurance costs over the life of the policy. Like ART policies, you also receive a guaranteed level death benefit.
The insurer is able to do this because it collects more than what’s required for just one year’s worth of coverage. It then invests the excess premium to help pay for future insurance costs. Insurers call this “level premium funding.” These policies are typically sold as 10, 20, and 30 year level term policies.
The advantage of these policies is that the premiums never change during the contract period. The disadvantage is that premiums may be higher than what you would pay in the early years of an ART policy and, at the end of the term, premiums may be substantially higher if you want to renew coverage.
Whole Life Insurance
Whole life extends guaranteed death benefit coverage out to your age 100 instead of providing coverage for a set number of years. The advantage of this is that you don’t ever have to worry about renewing coverage, and premiums are usually level for the life of the policy.
It also comes with a “cash value” that you can use during your lifetime via life insurance policy loans. Repayment terms are flexible and loans do not need to be repaid until your death. Any borrowing activity reduces the dead benefit by an equal amount until the loan is repaid, however. Some insurers also provide preferred loan rates on policy loans, making the cash value an ideal source of emergency funds.
The disadvantage of whole life is that premiums may be substantially higher than term life insurance. Also, if you cancel the policy (or it lapses due to non-payment of premiums), you may end up paying income tax on any gains in the cash value (the IRS generally regards a “gain” as any amount in excess of the total premiums paid into the policy).
Universal Life Insurance
Universal life insurance consists of a one-year annual renewable term life policy and a cash value account. Each month, you pay premiums and the insurance company deducts money from the cash value account to pay for the death benfit. If the cash value ever reaches $0, your policy lapses and you lose your insurance.
The major advantage of this policy type is its flexibility. For example, you can alter the death benefit amount and premium payments any time after the contract is issued. Unlike whole life and term life, however, the death benefit may not be guaranteed and premium payments may not remain level for your lifetime.