Life Insurance Buyers Guide

As you are probably already very well aware, there are numerous different types of life insurance policies from a wide variety of life insurers to choose from.

Whilst this certainly helps to give the consumer plenty of choice and drive down prices through competition, it can be a little confusing when it actually comes to buying the right life insurance policy that meets your specific needs and requirements.

Getting the right policy is obviously very important, because the type of coverage that you take out must be able to provide an adequate death benefit payment to your dependents, otherwise, your loved ones could end up struggling financially if you were to pass away suddenly.

So to help simplify the process, we have provided some of the best tips on the different types of policies available so that you will be able to quickly decide what you need and what you don’t need. Hopefully, this should then make buying the right life insurance policy a lot easier for you!

Permanent Life Insurance

If you require a life insurance policy to provide you with coverage until you die, then you want to purchase a permanent rather than a temporary, or term, policy. Such policies will pay out a death benefit to your dependents, which could include a spouse, children or a charity, whenever you die, unlike term policies which only pay out during the term in which you have been insured for.

If you want permanent coverage but cannot currently afford it, a good alternative is to buy reentry level term life insurance. Level term policies are relatively inexpensive, and give you the option to convert your term coverage to permanent coverage at a later date without requiring medical approval. This means that regardless of your current state of health, your insurer will guarantee acceptance into a permanent coverage plan.

Types of permanent policies

There are three main types of permanent life insurance policies that you can choose from, these are:

• Whole life
• Universal life
• Variable life

Below we provide a quick review of each policy and discuss some of their main advantages and disadvantages.

Whole Life Insurance

Whole life policies are one of the more popular types of permanent life insurance because they greatly minimize the amount of uncertainty and financial risk associated with having life insurance.

With a whole life coverage plan, you will have level premiums throughout the duration of your policy agreement and a fixed rate of interest on your cash value reserve.

From a financial planning perspective, this means that you will know exactly how much your policy is going to cost you each year and how much your cash value reserve will grow over time. As a result, if you keep a budget, having whole life coverage can make sorting out your monthly or yearly expenses very simple as you are dealing with fixed rates.

The downside to this however, is that having fixed costs may mean you not getting the full benefit from your policy. With universal life coverage for example, policy costs can be reduced if your insurer is able to reduce their net operating costs such as by moving to a smaller premises or employing technology that reduces the amount of staff a company needs to operate. Mortality costs can also fall with universal life plans if new treatments or drugs are developed which prolong human life and/or reduce the risk of disease.

Of course, it is only fair to point out that just as costs can go down with universal life policies, so can they also go up, which is why whole life policies are generally regarded as being the safer option.

Another potential drawback to whole life policies, is that receiving a fixed rate of interest on your cash value reserve may result in you not always getting the best rate of return from your investment. If your interest rate is below the rate of inflation for example, then your savings are not really increasing in value, even though they are still growing, because inflation is causing the value of those savings to decrease in terms of their raw purchasing power.

Where a fixed rate can prove to be advantageous, is if your fixed rate is above the rate of interest that you would get elsewhere. So whether or not a fixed rate ends up working in your favor, really depends on the current economic situation but this is obviously something which is extremely difficult to make an accurate long-term prediction about.

Overall, a whole life insurance policy is a good way to reduce risk and uncertainty, but it does leave you vulnerable to changes in the economy not all of which will end up benefiting you.

Universal Life Insurance

Universal life insurance policies are a lot more flexible than whole life policies, as the costs and interest rates they offer are variable not fixed. This however, comes at the expense of exposure to greater risk and financial uncertainty.

For example, if your insurance company starts to expand and as a result leases some new buildings and takes on more staff, the expense costs associated with your policy will likely be increased as a result of the increased expenditure that company has incurred.

In addition, if a new disease becomes prevalent in your country and large numbers of people start dying from it, then your mortality costs could also increase resulting in the overall costs to maintain your policy going up quite significantly.

With your cash value reserve, if interest rates fall due to the economy performing poorly, then the rate that you receive on your cash value reserve will also fall. Most insurers however, will guarantee a bottom limit so that your rates cannot fall to zero.

With all this extra risk that you are taking on by having universal life coverage, you may start to wonder why anyone would want to take out this type of coverage at all? One of the main reasons people take out universal life insurance is because with these extra risks come potentially very large rewards.

For example, if advances in medical technology and treatments result in people becoming healthier in society and experiencing less overall disease, then your mortality costs will eventually fall to reflect the fact that people are now healthier and living longer as a result of those medical advances. Likewise, if interest rates start to rise, so will the interest you earn on your cash value reserve.

Overall, universal life coverage is perhaps the best policy to have when things are going well in society and with the economy, as during such times you are likely to experience the lowest life insurance costs and the greatest returns. But when things are not going so well, then you are going to feel it in your policy costs as they will rise which will also cause your overall personal expenses to rise.

Variable Life Insurance

Variable life insurance is very similar to whole or universal life insurance, except that you have the option to invest some of your cash value reserve into the stock market or other investment vehicle.

The advantage of doing this is that you can potentially receive a much greater rate of return than you would normally get with a fixed or variable rate policy. As a result, you can end up with much more money in your cash value reserve over time.

The obvious drawback to this however, is that stock market investing is a very risky type of investment, and if your investments perform poorly, then you could end up with a lower rate of return than you would have received with a fixed or variable interest rate.

Variable life policies are the riskiest type of permanent life insurance that you can take out, and so they are only really recommended for experienced investors or for people who have access to good financial advisors.

Term Life Insurance

Term life insurance is designed to provide coverage for a specific term or period of time. When your term runs out, so does your policies coverage. Term life is therefore most suited to people who require temporary coverage or who cannot currently afford permanent coverage.

For example, if you want to receive coverage only while your children are growing up, while your children are in full-time education or to cover the period while you pay off your mortgage, then you would benefit from having a term life policy.

Having term life coverage will mean that if you die any dependents who are currently reliant on your income can be supported financially, and also, that any financial obligations which you may have can be taken care of during the term of your policy.

There are five main types of term life insurance policies that you can take out, these are:

• Annual renewal term
• Reentry term
• Flexible policies
• Private policies
• Decreasing term

Annual Renewal

An annual renewal term life policy is one that you renew every year. This is most suitable for individuals who require coverage for only a few years, as its costs will increase each year making it increasingly more expensive to maintain.

You should only purchase such a policy however, if it is less expensive than purchasing a ten-year reentry level term policy.

Reentry

A reentry level term life policy is suitable for individuals who need long-term coverage, but do not have enough money to take out a permanent policy, such as a single mother.

This type of coverage is set to renew when your existing term expires. But be aware that in order to qualify for a renewal you must be medically approved, otherwise, you will have to purchase a much more expensive permanent policy instead.

For this reason, it is recommended to purchase a reentry level term for the period that you think you will need it for plus five or ten years extra, just in case you no longer qualify for renewal.

Flexible

When you are buying term life you won’t be able to predict what your specific needs and requirements will be when your term expires. You therefore want to choose a policy that gives you the flexibility to accommodate your future needs.

This can be done by only purchasing term life coverages that offer guaranteed renewal and the option to convert to a permanent policy at a later date.

Private

As a general rule, you should always try to buy private term life insurance as opposed to group life insurance through your employer. The main reason for this is that if you lose your job, then you will very often lose your coverage.

The only exception to this is if you are relatively confident that you will remain with your employer for a long period of time, or that the group policy is significantly cheaper than taking out a private policy.

Decreasing Term

Try to stay away from decreasing term policies. Prices tend to be higher than other similar policies, and your coverage gradually decreases throughout the life of your policy.

Since your coverage needs are not likely to decrease in line with the policy, you would be better off choosing an alternative form of coverage such as reentry level term.