Financial advisers and experts universally recognize life insurance as the foundation of an individuals financial house. However, many consumers do not understand what their options are and are confused about what type of life insurance is right for them.
9 out of 10 life insurance policies sold are whole life insurance policies. In order for a policy to be a whole policy, it must contain a combination of a life insurance component, and a savings component. Both of these components are quite different than many other similar financial products.
Life insurance in a Whole policy typically is not on a fixed term, meaning that it covers someone until the day that they die (unless they live past the age of 100). In general, the coverage amount is determined at the start of the policy and never changes.
The savings component of a whole life policy is rarely understood by consumers. The contributions for this savings plan are not deposited into a savings account, but instead a portion of your premium (the amount you pay every month or year) is invested by the insurance company. Regardless of the return on investment for the insurance company, you receive your money back in the form of an interest rate based on a certain portion of your premium.
The coverage in a whole life policy rarely changes, and it is not likely that an insured will ever have to undergo medical exams after initially accepting the policy. This is perhaps the most attractive feature of the policy.
The addition of a savings component is also coveted by some consumers. The policy is, in effect, a forced savings plan. Customers must pay their premium in order to keep their insurance, and a portion of the premium is used for savings. The interest policy owners receives is typically 3-4%. At age 100 the policy endows, meaning that the owner receives their entire savings, but coverage ends.
In some cases, customers are given the option of converting their savings into another insurance product or even an annuity tax-free.
Whole life insurance is the most expensive form of life insurance, costing on average three times as much than term insurance for the same amount of coverage. In addition to the high cost, middle-class consumers are often put off by the low amount of coverage when compared to term insurance.
The savings component of a whole life policy are confusing and hard to understand. Unknown to most whole life customers, the savings in a policy usually do not accrue interest in the first few years. Additionally, 3-4% interest rate, though higher than most banks, pale in comparison to such investment vehicles as mutual funds or real estate.
Perhaps the most controversial aspect of whole policies is that when one draws from their savings they are required to pay the amount back to the insurance company, plus interest. If the policy owner does not repay this money, it is deducted from their benefit if they die.
Term insurance is the simples and cheapest form of life insurance. The policy is purchased for a set amount of year at which time the policy expires. In some cases the insured may reapply for the same insurance, but they will sometimes be subject to new underwriting, meaning their premium might be higher. Some customers might not be eligible for insurance at all.
Term insurance does not include a savings component.
For most Americans term life is the best option for life insurance. The low premiums make it accessible to middle-income families and allow policy owners to purchase insurance on the whole family, not just themselves. Most policy holders take advantage of the low premiums to obtain higher amounts of coverage as well.
The lack of a savings component allows term life customers to do their investing on their own, allowing them a higher rate of return and more control. This means that people who would not normally be able to afford high interest investment vehicles can do so.
Term insurance expires after a certain period of time, meaning the insured must either live without insurance, or buy insurance again. While most companies guarantee acceptance after the term is over, insured typically must be re-underwritten, meaning that they will likely pay a higher premium.
Because term life is such a cheap product, the market is filed with shady salesmen taking advantage of buyers with bad policies. Some agents attempt to conceal or turn attention away from a short term, or "forget" to mention that an insured premium will likely increase at the end of a term.
DISCLOSURE OF MATERIAL CONNECTION:
I sell insurance, but my company is not discussed