Understanding Life Insurance: Choosing Your Beneficiaries

Life insurance is a financial safety net that provides a lump-sum payout, known as a death benefit, to your chosen beneficiaries after your death. The death benefit can be used for any purpose, such as income replacement, paying off debts, or funding children's education. When taking out a life insurance policy, you can choose who will receive the benefit upon your death.

Term life insurance: Coverage for a set number of years

Term life insurance is a type of life insurance that provides coverage for a specific period or term. It is designed to offer financial protection to your loved ones during the years when they are most dependent on your income, such as while raising children or paying off a mortgage. Here are some key features and considerations regarding term life insurance:

Coverage Period

Term life insurance policies typically offer coverage for a fixed period, usually ranging from 10 to 30 years, with some companies offering terms of up to 40 years. You can choose the length of the term that best suits your needs when taking out the policy.

Premiums

The premiums for term life insurance are generally more affordable compared to permanent life insurance. The cost of premiums depends on various factors, including age, gender, health, policy choices, and other factors. The premiums tend to increase significantly if you choose to extend the policy beyond the initial term.

Death Benefit

Term life insurance provides a guaranteed death benefit to your beneficiaries if you pass away during the policy term. This benefit is typically tax-free and can be used to cover expenses such as funeral costs, outstanding debts, and supporting dependants' needs.

Renewable and Convertible Policies

Some term life insurance policies offer renewable or convertible options. Renewable policies allow you to extend the coverage beyond the initial term, but at a higher cost. Convertible policies give you the option to turn your term policy into a permanent life insurance policy, providing lifelong coverage.

No Cash Value

Unlike permanent life insurance, term life insurance does not accumulate cash value over time. It solely focuses on providing a death benefit during the specified term and does not offer investment or savings components.

Medical Exam Requirements

When applying for term life insurance, you will usually need to undergo a medical exam to assess your health and determine the premium rates. This exam includes checking your vital signs, collecting blood and urine samples, and reviewing your medical history.

Suitable for Most People

Term life insurance is a good option for most individuals as it offers sufficient coverage at a lower cost compared to permanent life insurance. It is particularly beneficial for young families, as it provides financial security during the years when they need it the most.

Whole life insurance: Coverage for the rest of your life with a fixed death benefit and premium

Whole life insurance is a type of permanent life insurance that provides coverage for the entirety of the insured person's life. It is distinguished by its fixed premiums and death benefits, and the presence of a cash value component.

Whole life insurance policies are designed to last a lifetime, and as such, they are significantly more expensive than term life insurance policies. Whole life insurance policies also have fixed premiums and death benefits, which means that the amount you pay every month will not change.

Whole life insurance policies also have a cash savings component, known as the cash value, which functions similarly to a retirement savings account. The cash value of a whole life policy typically earns a fixed rate of interest, and the policyholder can draw on or borrow from this cash value. However, withdrawals and outstanding loan balances will reduce the death benefits.

Whole life insurance policies are further categorised into level payment, single premium, limited payment, and modified whole life insurance policies, based on how premiums are paid. Level payment policies have unchanged premiums throughout the duration of the policy, while single premium policies involve a one-time large premium payment. Limited payment policies involve higher premiums for a certain number of years, after which no more payments are required. Modified whole life insurance policies have lower premiums for the first few years and higher premiums in the later years.

Whole life insurance is a popular choice for those seeking lifelong coverage and the ability to build cash value over time. It is particularly useful for businesses as a contingency plan for the loss of a key employee or partner. It also provides financial security for families who rely on the income of a single person.

Universal life insurance: Permanent coverage with adjustable premiums and death benefit

Universal life insurance is a type of permanent life insurance that offers flexible premiums and death benefits. It is a good option for those who want permanent coverage but need flexibility in payments. It also allows the policyholder to build cash value over time, which can be used to pay premiums or withdrawn as a loan.

The insurance company takes out the cost of insurance and administrative fees from your premium payments, and the rest is added to the policy's cash value. This cash value grows over time based on an interest rate set by the insurer, providing a savings component to the policy. Policyholders can adjust their premiums and death benefits according to their needs and life circumstances.

Advantages of Universal Life Insurance

• Flexible premiums and death benefits: Policyholders can increase or decrease their premium payments and death benefits as their needs change. This flexibility can be useful for those with fluctuating incomes or life events such as the birth of a child.
• Potential cash value growth: The cash value component of the policy earns interest, providing an opportunity for growth. Policyholders can borrow against or withdraw the cash value, offering a source of funds during their lifetime.

Disadvantages of Universal Life Insurance

• Requires monitoring: Policyholders need to keep an eye on the cash value. If the cash value drops too low, the policy may lapse or require large payments to maintain coverage.
• Exposure to risk: The interest rates on the cash value are not guaranteed and can fluctuate with market changes. If interest rates drop, the cash value may not grow as expected.
• Complex and expensive: Universal life insurance policies are more complex than other permanent policies and typically come with higher premiums. The flexibility they offer may not be worth the cost for those who don't need to make adjustments to their coverage.

Variable universal life insurance: Permanent coverage with cash value tied to investments

Variable universal life (VUL) insurance is a permanent life insurance policy with a savings component in which cash value can be invested. It combines lifelong insurance protection with flexible premiums and cash value that can be accessed while the policyholder is alive. VUL is similar to variable life insurance, but it allows the policyholder to change the premium payment amount.

VUL insurance policies are built like traditional universal life insurance policies but allow the policyholder to invest the cash value in the market via subaccounts. The return on the cash component is not guaranteed and can fluctuate with market performance. Policyholders can lose money and may need to pay higher premiums to maintain their coverage if their cash value balance is too low.

VUL insurance offers increased flexibility and growth potential over other life insurance options. Policyholders can pick how to invest their cash value and can adjust how much they pay into the policy each year. However, VULs can also carry high fees and charges, and there is a risk of losing money due to market fluctuations.

VUL insurance may be suitable for those who want permanent life insurance protection, have a higher risk tolerance for investing, and prefer to manage their investments. It could also be an option for those who have maxed out their other retirement accounts and are looking for more tax-deferred investment growth.

Final expense insurance: Covers end-of-life expenses with no medical exam required

Final expense insurance, also known as burial insurance, is a type of whole life insurance that covers medical bills and funeral expenses when the policyholder dies. It is a popular choice among seniors due to its affordable price, smaller benefit amounts, and focus on covering funeral costs. The average cost of a funeral can be over $9,000, and final expense insurance ensures that loved ones are not left with this financial burden.

Final expense insurance is easy to qualify for and does not usually require a medical exam. Coverage is typically based on the applicant's answers to health questions on the application form. Most final expense plans have the following features:

• Whole life insurance with no expiration if premiums are paid
• Cash value that the insured can borrow against
• Fixed premiums as long as they are paid
• Simplified issue with no medical exam required
• Easy application process
• Fast approvals, with coverage often issued within days

The cost of final expense insurance depends on factors such as age, sex, health, coverage amount, and the chosen insurance company. The average policy costs between $30 and $70 per month, but rates increase substantially with age. For seniors with significant health conditions or over the age of 70, the premium will likely be higher, ranging from $70 to $120 per month. Younger applicants in good health may qualify for rates in the $20 to $50 range.

While the beneficiary can use the death benefit for any purpose, final expense insurance is designed to cover end-of-life expenses, including funeral arrangements, burial costs, cremation, and outstanding medical, legal, or credit card bills.

Frequently asked questions