Life Insurance Simplified: Comprehensive Cover Explained

Life insurance is an important investment that can help protect your loved ones from financial hardship in the event of your death. Comprehensive life insurance refers to the various types of life insurance policies available, each with its own unique features and benefits. These policies can be broadly categorized into term life insurance and permanent life insurance, with the former providing coverage for a specified period and the latter offering lifelong protection. Permanent life insurance, often referred to as whole life insurance, includes several subcategories and provides additional benefits such as building cash value over time. Understanding these differences is crucial for making informed decisions about which type of policy best suits your needs and goals.

Whole life insurance

The cash value component of whole life insurance functions like a savings account, allowing the policyholder to withdraw or borrow against the accrued cash value during their lifetime. This cash value grows over time, tax-deferred, and is eligible for dividends. The ability to access funds during the policyholder's lifetime makes whole life insurance a more comprehensive solution compared to term life insurance.

Universal life insurance

The cash value component of universal life insurance functions like a savings account, allowing policyholders to build cash value over time. This cash value earns interest, which is set by the insurer and can change frequently. While the interest rate is not guaranteed, some insurance companies may offer a minimum guaranteed rate to mitigate the risk of low-interest rates. Policyholders can borrow against the accumulated cash value, providing access to funds at a low-interest rate without tax implications. However, any unpaid loans will reduce the death benefit paid out to beneficiaries.

One of the key advantages of universal life insurance is its flexibility. Policyholders can increase or decrease their premiums and death benefits within certain limits. This adaptability makes it a good option for individuals with variable incomes. Additionally, the cash value component offers the potential for growth, providing an opportunity for policyholders to build assets.

However, there are also some disadvantages to consider. Universal life insurance can be complex due to the various options and variables involved. Policyholders need to actively manage their policy, including determining premium amounts and, in some cases, making investment choices. The fluctuating interest rates and the potential for underperformance can impact cash value growth and increase the risk of large payment requirements or policy lapse.

In summary, universal life insurance offers the advantage of flexibility, allowing individuals to adjust their premiums and death benefits. It provides an opportunity to build cash value and offers loan options. However, the complexity and potential risks associated with fluctuating interest rates and underperformance are important considerations.

Term life insurance

Comprehensive life insurance is a topic that can cause an emotional reaction, as it involves acknowledging the reality of death. However, it is also a wise move to prepare for the worst-case scenario. Life insurance is a way to prevent sudden financial strain on your dependents after your death. It is a safety net that protects your family from financial hardship and gives you peace of mind.

Now, what is term life insurance?

There are several types of term life insurance policies:

• Fixed-term life insurance is the most common form, with a fixed coverage amount and premium payment.
• Decreasing term life insurance features a coverage amount and premium that decreases over time, suitable for those who will need less coverage towards the end of the policy term.
• One-year, short-term life insurance is an affordable option for temporary coverage needs.
• Simplified issue term life insurance does not require a medical exam, providing faster coverage.
• Annual renewable life insurance provides coverage on a yearly basis and must be renewed by the policy end date. This option is best for those needing short-term coverage but can be more expensive.
• Group term life insurance is purchased through your employer and functions as a workplace plan, deeming all employees eligible for coverage.

When deciding between term and whole life insurance, consider that term life insurance rates are typically lower because you are only paying for a specific period. Whole life insurance rates are almost always higher, but the coverage extends throughout your entire life, and the death benefit is guaranteed. Term life insurance is ideal for those with a specific timeline, such as young families or seniors mapping out their future, while whole life insurance is often chosen by mature buyers to expand their financial portfolio.

Annuities

There are three participants involved in an annuity contract:

• Owner: The person who buys the annuity and pays the premiums
• Annuitant: The person, usually the owner, who is entitled to receive the annuity payments (and whose age and life expectancy are used to calculate benefits)
• Beneficiary: The person who receives the death benefit when the annuitant dies (e.g. a surviving spouse)

There are several types of annuities to choose from. Before selecting, consider your financial goals for the future, the timeframe for when a payout is desired, and the fee structure. Here are some of the different types of annuities:

• Immediate annuity: Payout starts shortly after a single premium payment is made.
• Deferred annuity: Payout starts at a set date in the future.
• Fixed annuity: Payout is based on an amount guaranteed in the contract. Payments are normally fixed, and the insurance company bears the investment risk.
• Indexed annuity: This provides a guaranteed return with the option of sharing in investment market earnings.
• Variable annuity: With this annuity option, accumulation and payout are variable and not guaranteed, although contracts may offer minimum guarantees as an option at an additional cost. There are also fees and charges to consider with this annuity type, including mortality and expense, contract fees, administrative fees, and the cost of the underlying investment options.

Immediate annuities are often purchased by individuals of any age who have received a large lump sum of money, such as a settlement or lottery win, and prefer to exchange that money for cash flows into the future. Deferred annuities are structured to grow on a tax-deferred basis and provide annuitants with guaranteed income that begins on a date they specify.

Variable annuities are regulated by the Securities and Exchange Commission (SEC) and state insurance commissioners. Fixed annuities aren't securities, so they're regulated by state insurance commissioners rather than the SEC. Indexed annuities are normally regulated by a state insurance commissioner. They're regulated by the SEC as well if they're registered as securities.

The Financial Industry Regulatory Authority (FINRA) also regulates variable and registered indexed annuities. Agents or brokers selling annuities must hold a state-issued life insurance license as well as a securities license in the case of variable annuities. These agents or brokers typically earn a commission based on the notional value of the annuity contract.

The cash value inside permanent life insurance policies can be exchanged for an annuity product without any tax implications in many cases.

When is life insurance worth it?

Life insurance is a tricky topic, as it forces us to acknowledge that death is inevitable. While it's healthy not to expect the worst, it is wise to be prepared for the worst-case scenario.

• Your spouse is a dependent: If your spouse relies on your income, they will immediately feel the financial effects of your absence. A death benefit will give them time to grieve and eventually find a job without experiencing financial hardship.
• You have young children: If you have or plan to have children who will be financially dependent on you, you should plan to provide for them if you are no longer around. A 2016 survey revealed that 20% of households with minor children do not have life insurance, and 62% of these uninsured families recognised that they would experience immediate financial trouble if the primary wage earner died.
• You care for an elderly parent or relative: If you care for an elderly relative who would need professional care if you were no longer around, having life insurance and listing them as a beneficiary can help cover the costs of maintaining their quality of life.
• You are a business partner or employer: If you have partial ownership in a business or employees who depend on you for their income, having life insurance will provide a buffer and ensure that you do not leave those who depend on your financial contributions in a difficult situation.
• You have significant debts: If you have significant debts, such as a mortgage, these could become a burden for your heirs if you die. The death benefit your beneficiary receives can be used to pay off your loans or even pay them in full.
• You want to cover your funeral expenses: Even if no one depends on you financially, you have your final costs to consider. According to the National Funeral Directors Association, in 2016, the average cost of a viewing, funeral, and burial that included a vault was $8,508. Your family may experience financial strain in covering these expenses unless they have a death benefit to cover them.

On the other hand, here are some scenarios in which life insurance may not be worth it:

• You are single with no children: If you don't have a spouse or children who rely on your income, your death would not leave anyone in a state of financial hardship. However, you may still want life insurance to cover your funeral and burial expenses.
• You are a retired senior citizen: Since life insurance is primarily designed to protect against an untimely death, if you are of advanced age and have already retired, traditional life insurance policies may not be the smartest investment.
• Your children are grown: If your children have grown up and are now self-sufficient adults, you don't need to leave them a death benefit. However, if you have a spouse who is your dependent, their financial well-being still needs to be considered.
• You have sufficient assets: If you have built up enough wealth and income streams to keep your family comfortable, you may not need life insurance.

In general, life insurance is worth it if your death would place a financial burden on other people. It is also worth considering if you want to cover your own burial costs, replace your income for your dependents, or cover your debts.

However, if your death wouldn't leave someone in a financial bind, life insurance may not be necessary. This could be the case if no one relies on you financially, it's not in your budget, or your primary goal is to build up wealth rather than provide a safety net for your loved ones.

Frequently asked questions