09/30/2022
Term Vs. Whole Vs. Accidental Life Insurance Policies. The good, the bad, the great and the ugly
Term- As the name suggests, a term policy is meant to be temporary and covers you for a specific amount of time. You can get policies for 10-year, 15-year, 20-year, 30-year and in some cases even a 25-year term. So what does that mean? Well if anything happens to you within that amount of time, your beneficiaries will collect the death benefit. What happens if you outlive that policy? Well, that depends on how you set your policy up initially. If you got a 30-year term with a Return of Premium (ROP), you could get 100% of your monthly payments back! Or you could use that premium money to convert to a reduced paid-up whole life policy. If your initial policy did not include a ROP, your policy just expires, no benefits will be paid.
So what are the pros?
1- Terms are one of the cheapest policies available offering you MORE coverage for lower prices to you.
2- You can convert the policy at a later date.
3- It's a great option for TEMPorary expenses. (For example-- Mortgages you still owe on. Which the lower premium with more coverage options would allow you to choose an amount to pay off your mortgage in full, partial or provide the monthly payments until your heirs were able to sell the property).
4- You have a wider range of optional riders you may add on such as accidental riders, children riders, disability riders, waiver of premium riders, etc. (You can still get riders with whole life, but not as much as with term, nor the amount of customization
5- Terms are usually easier to understand, easier to apply for, usually require no health exam, and are fairly simple to make changes to if necessary.
Cons of a term:
1- Is only TEMPORARY
2- Does not accumulate cash value as the policy ages and premiums are paid
3- You run the risk of not being able to convert to a whole life policy if health conditions come up (CERTAIN POLICIES, NOT ALL. BE SURE TO ASK THIS QUESTION FOR THE SPECIFIC POLICY YOU WANT OR CURRENTLY HAVE).
4- As you age, it becomes harder and harder to secure a term insurance policy. The general cut off age (not for all products and all carriers but a collective average) is around the age of 65.
5- Approximately 1% of term policies end in a death benefit claim. Meaning if you did not have it set up to roll over to a reduced paid up whole life, a ROP to collect your premiums back, etc. You may miss out there!
6- Premiums are likely to increase if you keep the policy in force after your selected time is up. Usually considerably higher premiums.
Ahhh. Time for the whole life policy!
So what is the whole life?
A whole life policy is a policy that is good from the day your coverage begins all the way until you were to pass away (or age 100/120 in certain scenarios). Depending on the policy you get, you could make monthly payments until the day you die or age 100/120, one lump sum up from, or payments for a set amount of time. If you were to pass away a week from the policy, you're beneficiary would collect. If you were to pass away 40 years later, as long as the policy is still active, your beneficiaries would collect the death benefit.
Pros of a whole life:
1- Guaranteed death benefit until age 100/120, or your death as long as the policy remains in force.
2- BUILDS CASH VALUE as the policy ages and matures.
3- Premiums stay the same (with the exception of the pay for certain amount of years. It will stay the same for those years, and then you will owe nothing monthly after the required years have been paid)
4- Cash value can be taken out as a loan, and cash value can grow tax-deferred
5- If you surrender your policy, you will recieve the built up cash value will be returned to you (providing your policy is old enough to have a cash value).
Cons of a whole life:
1- Typically whole life policies are more costly than term policies. One study even suggests it could cost as much as 10x more than a term.
2- Usually you will end up with lower coverage amounts with a whole life policy due to either restrictions, costs or both.
3- Surrendering your policy may be costly and very hard to do.
4- Could be extremely costly if coverage lapses.
5- Limitations on investments
6- Lack of flexibility. Many people will grow families, gain or lose expenses, and as you age, your insurance needs may change. Certain whole life policies Lock you into a FIXED death benefit, that you may find becomes too little or too much coverage.
And last but not least- the good ole Accidental Life Insurance Policy!
What is an accidental policy you may ask?
Well it is just what it sounds like. It is in place in the event of an accident. It is also a form of a whole life policy. They are typically referred to as an AD&D (Accidental Death & Dismemberment). This type of policy only pays out if the insured individual is in a covered accident that causes then a loss of life or a severe injury such as blindness, loss of a limb, or even paralysis. Some examples of covered accidents include (but are not limited to and subject to each AD&D policy guides), exposure to the elements, traffic accidents, homicide, falls, drowning, and accidents involving heavy equipment. These types of policies are generally used to supplement another life insurance policy and are NOT suitable for stand alone life insurance plans. You can typically recieve cover up until the age of 70.
What are the pros of an accidental policy?
1- The ability to obtain large death benefit amounts.
2- Cheap insurance premiums.
3- Are used to supplement/compliment another life insurance policy.
4- Insured will recieve a payout if they were involved in a covered accident and recieved qualifying injuries. So it's not just a death benefit.
5- Locked in premium amounts.
6- Guaranteed Issue in most cases, regardless of health status.
7- Coverage can be obtained almost instantaneously.
8- Coverage lasts your entire lifetime.
Cons of an accidental:
1- Only pays a death benefit or a Dismemberment payment IF the insured was involved in a qualifying accident that resulted in a death, or a qualifying injury. (Different plans and carriers have different requirements so be sure to ask your agent what your limitations would be).
2- Is not meant to be the only life insurance policy you have, but instead should be used as a supplemental policy.
3- Builds no cash value like a traditional whole life.
4- You can cancel at anytime, but you will not recieve any premiums paid back to you.
5- Does not have the Return of Premium Option.
So...... Which policy type would be the best choice for you?
Here are 12 questions I ask all of my clients to help me determine which policy would be best suited for them!!!
1) What is my current age? Am I just starting out in the world? Or am I nearing retirement age?
2) Do I have any large temporary expenses such as a mortgage?
3) Do I have young children, or maybe want to have children in the future?
4) What does my health look like? Do I have diabetes? Do I have heart problems? Do I have cancer? Do I have a good clean bill of health?
5) Do I have a dangerous job or hobby?
6) What does my monthly income look like compared to what my expenses are? Can I afford a $50 policy? Could I afford even more coverage? If I have a SO, could he/she survive without my income?
7) Do I want to leave money behind to children or maybe a college fund? Maybe grandchildren? Maybe an organization that I believe does amazing work that I would love to donate to?
8) Who is my beneficiary? What will the expenses look like for them? For my burial, for my cremation, for my debts, for my home, for losing my income? What would they need to be able to survive??
9) Would I benefit from a policy that I could borrow money from? Is the extra costs worth that to me?
10) Where do I see myself in 10 years? 5 years? 30 years?
11) Are there any health conditions that is heredity that runs in the family? Do I have a low or a high chance of being diagnosed with a condition that may render me unisurable at an affordable price?
12) Is my income expected to change? Am I going to be on a fixed income? Am I expected to endure a decrease in my income? Do I expect my income to increase? Do I have someone else's income that I currently rely on to help me pay my bills? What will my income look like 10 years? 20 years? 30 years?
If you're insurance agent is not explaining the different policies to you, asking you those questions to determine what is right for you, YOU NEED A NEW INSURANCE AGENT THAT ACTUALLY WANTS TO HELP YOU.
We can customize most insurance policies just for you! We can add riders on that helps suits your needs!
Never be afraid to reach out and ask questions! Give us a call today or send us a message to help you get the coverage you need AND DESERVE!!! We are here to help!!
