The first life insurance policy in the United States was issued before it was even called the United States.
With centuries to grow and evolve, the life insurance industry now includes hundreds of carriers and thousands of products. So where do you begin?
Let’s start with the three major types of life insurance: term, whole life and universal life.
Term insurance provides a death benefit if you die before a certain age or set number of years
Term insurance covers you for a time period, or term, either up to a certain birthday or for a fixed number of years. It pays a death benefit only if you die in that term. Term insurance generally offers the most insurance protection for the premium dollars you pay. If you live longer than the term of your policy, then you and your family likely get nothing.
You can renew most term insurance policies for one or more terms, even if your health has changed. Each time you renew the policy for a new term, premiums may be higher. Ask what the premiums will be if you continue to renew the policy. Also ask if you will lose the right to renew the policy at some age.
For a higher premium, some companies will give you the right to keep the policy in force for a guaranteed period at the same price each year. At the end of that time, you may need to pass a physical examination to continue coverage, and premiums may increase.
Whole life insurance provides a death benefit when you die, no matter your age
Whole life insurance, a type of permanent insurance, covers you for your lifetime as long as your premiums are paid and your coverage remains in force. You generally pay the same amount in premiums for as long as you live.
Premiums can be several times higher than you would pay initially for the same amount of term insurance. But they are smaller than the premiums you would eventually pay if you were to keep renewing a term policy until your later years.
Some whole life policies let you pay premiums for a shorter period such as 20 years, or until age 65. Most whole life policies do not have any flexibility. You will continue to pay the same premium for the duration of the policy, you cannot adjust the death benefit and there may be no value to you while you are still living.
Universal life provides a death benefit when you die, plus retirement savings
Like whole life, universal life insurance is permanent insurance, but it’s a more flexible type of policy that lets you vary your premium payments. You can also adjust the amount of your coverage, although if you wish to increase it you may need to provide proof you qualify for the increased death benefit.
A universal policy also has cash value that can grow as you pay your premiums. This cash value can be used as tax-advantaged savings for your retirement. For this reason, you might see universal life insurance referred to as cash-value life insurance.
It works like this: ideally, your premium payments into your policy for the first several years will be enough to not only cover policy expenses, but also create a cash value “cushion” in the policy. This cash value will grow based on the interest your policy earns.
Once you’ve built up enough cash value, you can borrow against it by taking a policy loan, using that money for supplemental retirement income or other expenses that may come up later in life.
Universal life has two common products:
- Fixed indexed universal life (FIUL) – In this type of policy, you can place the account value into an “index crediting option” where its growth is tied to market-linked indexes. Your money is never actually invested in the market, allowing for both cash value growth and protection.
- Variable universal life (VUL) – Unlike an indexed product, your account value is invested in the market and subject to the market’s ebbs and flows. You will have higher death benefits and cash value if the underlying investments do well, but benefits and cash value will be lower if the investments you chose didn’t do as well as you expected.
The best time to buy insurance is when you’re young, but the next-best time is now
Whatever type of insurance is right for you, the sooner you decide, the more affordable your insurance can be. Younger and healthier people are less risky to insure, and that means they can get lower premiums – and for some products, lock those lower premiums in for life.
For additional information, talk with your insurance or financial professional.
Don’t have a policy but interested in learning more about products from F&G? We can help you find a financial professional in your area.
