Choosing the right life insurance for you, part 2By Randell Tiongson on July 21st, 2012
Question: What are the criteria in choosing a good life insurance?—Jeremy Jessley Tan (@jeremyjessley) via Twitter
Answer: My last column talked about determining first if you need life insurance and how much. I posted a table on life insurance analysis here. Assuming you have decided you needed a life insurance an.d you already have an idea how much coverage you need, the next question is what kind of life insurance should you buy and from whom should you buy it?
Generally speaking, there are two types of life insurance—term insurance and permanent insurance. Investopedia.com defines term insurance as “a type of life insurance policy that provides coverage for a certain period of time, or a specified ‘term.’ If the insured dies during the period specified in the policy and the policy is active—or in force—death benefits will be paid. Term insurance is initially much less expensive compared to permanent life insurance. Unlike most types of permanent insurance, term insurance has no cash value. It is the plain vanilla of life insurance; it is what we call pure insurance. Term insurance is recommended for those who want to maximize insurance protection while minimizing cost, as this type of insurance has the cheapest premium. It is interesting to note that less than 20 percent of term insurance policies are still in force when the insured dies and, therefore, never pay a claim. This product tends to be the least expensive insurance, initially. However, either the face amount decreases or the premium increases as the insured gets older. Term insurance provides death benefit protection only, has no cash value and not much versatility.
Permanent life insurance is “an umbrella term for life insurance plans that do not expire (unlike term life insurance) and combine death benefits with a savings component. The savings portion can build cash value—against which the policy owner can borrow funds, or in some instances, can be withdrawn to help meet future goals, such as paying for a child’s college education. The two main types of permanent life insurance are whole and universal life insurance policies, as per Investopedia.com. Whole life insurance is commonly referred to as ‘traditional life insurance.’ It is an insurance policy that matures at age 100 and has level paying premium, which means it does not go up unlike that for term insurance. You may opt to pay a whole life insurance until maturity or opt for shorter paying periods (at a higher premium).
Aside from death benefits, a whole life insurance policy also has cash value that can be withdrawn yearly or left to accumulate and earn interests. A whole life can also be a ‘participating’ plan, which can earn policy dividends. Policy dividends are allocated by an insurance company and dependent on the firm’s claims experience and investment returns. Most traditional life insurance plans will have a guaranteed cash value portion and a nonguaranteed portion (policy dividends).
Variable universal life or unit-linked life insurance differs from traditional universal life insurance because the underlying values can be invested, at the direction of the policy owners, in many sub-accounts—such as equity, fixed income and balanced account options. Policy owners are given the opportunity to direct their cash values based on their risk tolerance, investment objectives and personal asset allocation models. The policy owner assumes the risk in a variable policy, but has the potential for the highest return. Also, he can integrate the policy with his investment philosophy. Variable life insurance is typically recommended for longer-term needs, where cash accumulation, as well as death benefit protection, is a priority.
So which policy should you get and where should you get it from? I will answer that in Part 3 of this article due the limited space in this column. Catch it in two weeks.
Allow me to leave you with these words of wisdom regarding our fiscal responsibility to our loved ones—“But if anyone does not provide for his relatives, and especially for members of his household, he has denied the faith and is worse than an unbeliever.” — 1 Timothy 5:8, ESV