Take Control with Personal Insurance Planning

Personal insurance planning is part of being prepared financially. In this article you will find what types of life insurance will work best for you, and some things to be aware of.

What types of life insurance are there?

There are two types of life insurance. Term insurance and permanent insurance.

Term Insurance

Term insurance can either be renewable or level. A renewable term policy will provide coverage for a year, after which it must be renewed for coverage to continue. Rates on renewable term policies are always increasing, so each year the premium required to renew the policy gets more expensive.

Level term policies are designed to last anywhere between 10 and 30 years. During this time period, premiums stay level, but after this time period expires, they become very expensive.

Term insurance does not develop cash value, nor can term insurance earn dividends. Some term insurance policies have an option to be converted into permanent life insurance, these policies are known as convertible term policies.  

There are two types of permanent life insurance. Whole life insurance, and universal insurance.

Whole Life Insurance

Whole life insurance is designed to last for your entire life with premiums that remain level or even decrease over time. Unlike term insurance, well designed whole life insurance will build equity in the form of cash value. This cash value can be accessed by the policy owner with a policy loan, or by withdrawing the money from the policy. 

Policy loans are interest only loans. There are no requirements on how a policy loan can be used, or when it must be repaid.

Buying whole life insurance is like buying a home. Buying a home (whole life insurance) is initially more expensive than renting (buying term insurance). But over the years, as equity develops, buying a home becomes less expensive than renting.

Well-designed whole life insurance is, initially, the most expensive type of life insurance. But with a well-designed whole life insurance policy, cash value will steadily grow to the point where there is more money in cash value than has ever been paid in premium. 

Another feature unique to whole life insurance is the ability to earn dividends when written with a mutual insurance company. A whole life policy that earns dividends in called a participating whole life insurance policy. Dividends aren’t guaranteed, but it is always nice to participate in the profits of a successful company.

Universal Life Insurance

Universal insurance is also classified as permanent insurance. There are many different types of universal policies, Plain Universal, IUL, Variable, Guaranteed Universal etc. 

Unfortunately, universal policies suffer from several design flaws. Because of their poor design, the cash value and death benefit of universal policies decrease as the policy gets older. In later years, most universal policies require increased premium payments to keep the policy from lapsing.

While they may be classified as a permanent product, universal policies behave more like an expensive term policy.

Personal insurance planning may also consider Disability insurance or Long-Term care insurance.

Disability Insurance

There are two types of disability insurance, Own Occupation, and Any Occupation.

Own Occupation disability insurance will pay if the insured becomes unable to perform their own occupation because of a disability. 

If a surgeon breaks his finger and is unable to perform surgeries, an Own Occupation disability policy will pay out, as he is no longer able to perform his own occupation.

Any Occupation disability insurance will only pay if the insured become unable to perform any suitable occupation. Even though a surgeon is unable perform surgeries, if they can perform a different occupation, such as clerical work, an any occupation policy will not pay out.

Disability insurance is expensive and usually makes sense only for white collar workers in specialized fields.

Long-Term Care Insurance

Long-Term Care Insurance can help pay for expenses relating to long-term care. Long-term care policies have very strict restrictions. Benefits may only be accessed after a certain number of the seven daily living activities can no longer be performed and will only cover care expenses from certified health care providers. 

Long-term care policies also have a maximum benefit amount, once this amount has been paid out, the policy terminates. 

These policies are expensive, restrictive and you may end up not using them. 

Instead of paying for a long-term care policy, some people prefer to purchase a well-designed whole life policy. The cash value which accumulates can be accessed and used for any reason, which allows them to fund long-term care, if they end up needing it. The whole life policy also provides their family a death benefit when they die.

How much insurance should I have?

To adequately provide for the ones you love, it is important to be adequately insured. Many people like to have enough insurance to 

  • Pay off the home
  • Cover education expenses
  • Pay debts
  • Cover funeral expenses and
  • Provide replacement income

Many people are drastically under-insured. Without realizing it, they could be exposing their family to hardship if something happened to them.

The amount of life insurance you should have to properly protect those you love can be found by figuring what insurance companies call Human Life Value. 

Here is how to figure how much insurance you need according to your Human Life Value

Age Range: Amount of Insurance allowed
18-40 years old 25 x annual income
41-50 years old 20 x annual income
51-60 years old 15 x annual income
61-65 years old 10 x annual income
66-70 years old 5 x annual income

What type of insurance should I buy?

Well-designed whole life insurance is the best type of insurance to own because of the steadily increasing cash value which can be borrowed and used by the policy owner. Whole life insurance is initially more expensive, and it may not be feasible to purchase the size of whole life policy required to provide the needed death benefit. 

Everyone has unique life insurance needs, but often, the best insurance plan is a combination of whole life insurance and convertible level term insurance. The whole life insurance policy/ies start growing immediately, while the term insurance provides the remainder of the needed death benefit amount at a comfortable payment. Later, this term insurance can be converted to whole life insurance if desired.

It is important to purchase life insurance as soon as possible because insurance rates increase over time. If you would like to purchase well-designed life insurance that will work with your personal life insurance plan, or if you would like help creating a personal life insurance plan, contact us. We can help you.

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