When it comes to the financial health of your family or business, you probably think you have all of the bases covered: a good job, a good marketing strategy, savings, retirement and even investments. The question is, when you are no longer around to provide these, how can you protect your family and/or business?
The answer is life insurance. It doesn’t have to be a daunting concept, if you know the basics. Here we will share some basic policy concepts to help you decide which type of life insurance policy may be right for you.
Term Life Insurance
Term insurance is exactly what it sounds like: a policy that is purchased for a certain term, usually anywhere from 5 to 30 years. You can purchase term life insurance for a set number of years based on your age, your tobacco habits and many other features.
The monthly premium for the term can be either a fixed amount per month, or the premium may fluctuate up or down over the years, depending on when you are purchasing the policy and why (such as for the terms of a mortgage). The policy may be purchased at any age or stage in life, but age is a factor in determining the premium.
Pros: Premiums are typically much lower than other types of life insurance policies written for the same amount. There is usually no health exam associated with the policy wih lower limits of coverage, just a questionnaire about your personal habits, hobbies and job. Higher limits may require a paramed exam. Term insurance may also be transferred to a whole life policy during the term.
Cons: If you outlive the term your renewal will be at a higher rate. This is not an investment vehicle so there is no cash value to the policy. You cannot borrow against it.
Whole Life Insurance
This is the policy most people think of when they think of life insurance. In fact, many consider this to be a type of investment strategy.
A whole life insurance policy usually has fixed monthly premiums for the life of the policyholder. Underwriting of the policy is based on the age and health of the policyholder at the time the policy is written. Over time premiums paid would increase the cash value of the policy, allowing the policyholder to borrow against the policy for loans or emergency use.
Pros: The premium remains the same throughout the life of the contract. If there is sufficient cash value in the policy it may pay the premium in the event the policyholder is unable to do so. Policy creates a cash value over time.
Cons: Cost is higher than term insurance, especially if the policyholder is older or in poor health. The cash value of the policy is normally not paid in addition to the death benefits (face value), creating a lost investment opportunity.
Universal Life Insurance
Universal life is a sort of “convertible” type of insurance policy. It can be likened to either a term or whole life policy, depending on how it is set up, and may contain facets of both of these policies. The policy can be set up to suit the needs of the individual policyholder.
While the face value remains the same over the life of the policy, an insured can elect to have the cash value of the policy paid within the death benefit (but not in addition to it) or outside the death benefit (in addition to it). The rate at which the cash value accrues interest depends on this selection.
Pros: Can function as whole life or term. Flexible and highly customizable coverage.
Cons: Mortality fees (insurance company costs to pay out on the policy) can be high. Low guaranteed interest rate in comparison to whole life or other investment vehicles.
Key Person Insurance
In some businesses, there are usually one or two employees that are the lifeblood of the business – owners, founders and certain employees without whom the business could not survive. Businesses should think about purchasing Key Person Insurance policies on these people.
Key Person Insurance is purchased by the business, and the business is the beneficiary upon the death of the insured employee.
Keeping the business open:
Benefits paid out on the policy may be used to keep the company afloat while another person is hired to replace the key employee, if possible, or to fund a buy-sell agreement after the death of a partner.
Closing the business:
The benefits may also be used to pay debts and investors, pay severance to employees, and any other costs or expenses associated with closing down a business, helping to avoid immediate bankruptcy.
Please note that Key Person Insurance cannot be used in place of personal life insurance. Benefits are not paid out to individuals, and can only be used for business purposes.
Hayes Insurance offers a wide variety of options for your personal or business insurance needs. Contact us today to find out more.