There are many types of insurance out in the world. Life, critical illness, health and disability provide money to us and our families in the event of illness or accident. We have insurance for cars and homes. What other sorts? Credit insurance for loans or credit card interest, liability insurance for events or professions, and so on.
This month I’ll cover various types of life insurance.
There are permanent and term (generally 10 to 30 years) life policies available through many sources. Banks provide mortgage insurance. Other companies use dedicated sales people or brokers to provide access to their products.
How much insurance does one need? Generally, you want to replace income for a number of years, pay down or pay off debt (mortgages, lines of credit or credit cards), provide for education of children or for donations to charities. This is sometimes called the DIME method.
Insurance needs change with time: If a young couple have children, providing funds for them to go to secondary education and so on requires a large policy. Once they are out in the work force that need drops. Using several policies, some term and some permanent, to cover various needs for various years makes sense.
Insurance fine print: Cash value takes time to accumulate. If there are sufficient funds deposited in the first years of a permanent policy, you can take a premium holiday and the ongoing premiums will come out of the cash value. Men and smokers pay higher rates than women and non-smokers.
Term insurance is like renting a house. At the end of the term, you move out and take nothing but your own belongings with you. Any increase in the value of the property belongs to the owner, not the renter. All the premiums paid belong to the insurance company.
Permanent insurance has no other end point than death. That is, assuming you keep paying the premiums. There is a cash value along with the face value of the policy. The premiums for permanent insurance are higher than for an equivalent face value of term. The extra amount goes toward building your cash value. That pool of money is creditor protected in many cases. That’s why someone can declare bankruptcy and still have very significant assets.
Which is better? Both are useful: If there is a finite need, using a term product is better. If you have a mortgage and want to provide funds to pay it off, then term may be better, especially if you are determined to pay it off and not get another mortgage on another house when you sell.
If you think that your health may get worse with age, a permanent product is better, since you only have to qualify for coverage once. Set up properly, the rates for your policy will not change as you get older.
There are two types of permanent insurance: Universal Life (UL) and Whole Life (WL). Both accumulate a cash value, but the WL has a fixed premium that will build into a fixed and guaranteed cash value. The UL gives the insured the opportunity to increase the premiums to help the cash value of the policy grow faster. There are also limited pay options in which higher premiums are paid for a limited amount of time and the cash value then pays ongoing premiums. Ten and twenty year payments are the most common.
A bonus to permanent insurance is that the cash value can be creditor protected. Regular premium payments (of whatever value) don’t raise red flags in bankruptcy proceedings. Sudden large deposits just before declaring bankruptcy do.
Most insurance checks on your health before the policy is issued. Medical questions, lab tests and possibly a consultation with your doctor(s) may be necessary before a policy can be issued. With bank related policies, this is done at time of claim, and many claims are denied because the insured didn’t understand the questions asked. (Marketplace’s story on Mortgage Insurance is worth watching.)
Consult with insurance professionals for more information.
Fitzpatrick Financial Services
ROQ Financial (Insurance and Investments.