In choosing the type of life insurance policy you purchase, consideration must be given to the need which is being filled: funding retirement needs, creation of an estate, payment of estate settlement costs (federal and state death taxes, last illness and burial costs, probate fees, etc.), business buy-out, key-man coverage, etc.

Policy Type

Features

Consider the Need

Decreasing Term

Level premium, decreasing coverage, no cash value.

Suitable for financial obligations which reduce with time such as mortgages or other amortized loans.

Annual Renewable

Term

Increasing premium, level coverage, no cash value

Suitable for financial obligations which remain constant for a short or intermediate period such as income during a minor’s dependency.

Whole Life

Level premium, level coverage, cash values. Cash value typically increases based on insurance company’s general asset account portfolio performance.

Suitable for long-term obligations, such as surviving spouse lifetime income needs, estate liquidity, death taxes, funding retirement needs, etc.

Universal Life

Level or adjustable premium and coverage, cash values. Cash values increase based on the performance of certain assets held in the company’s general account.

Suitable for long-term obligations or sinking fund needs: estate growth, estate liquidity, death taxes, funding retirement needs, etc.

Variable Life and

Variable Universal Life

Level or adjustable premium, level coverage (can be increased by positive investment performance. Cash values are directed to a choice of investment accounts (bond, stock, money market, etc.) by the policy owner.

Suitable for long term obligations and those who are more active investors and for estate growth and death tax liquidity.

Single Premium

Whole Life

Entire premium is paid at purchase, cash values, level coverage.

Provides protection as well as being an outstanding asset accumulation vehicle.

NOTE: Withdrawals and loans may be available from permanent policies. There are different income tax consequences if they are “modified endowment contracts”

Term Life Insurance

Term Life Insurance provides death protection for a stated time period, or term.

  • Good choice for short-range goals
  • Provides temporary life insurance protection on a limited budget
  • Premiums increase when the policy is renewed
  • Can be converted to a permanent or whole life policy within a time frame that varies from company to company.

Permanent Life Insurance

Permanent life insurance provides death protection for as long as you live.

  • Good choice for long-range goals
  • Guaranteed cash values can provide money later on to help with temporary needs or emergencies
  • Level premiums

Not sure what type of insurance would be best for you?

When deciding which type of life insurance would best meet your need, four basic features should be considered:

  • Death Benefit
  • Premium
  • Cash Value
  • Duration of Coverage

Note: A combination of term life insurance and permanent life insurance is often appropriate.

Death Benefit

  • Term life insurance provides a death benefit for a stated period of time
  • Permanent life insurance provides a death benefit for as long as you live

Premium

  • Permanent life insurance premiums are generally level and payable for life
  • Term life insurance premiums will increase over time and are payable for a specific period of time
  • Term life insurance premiums generally increase at each renewal

Cash Value

Guaranteed Cash Values:

  • Term life insurance does not accumulate cash values
  • Permanent life insurance accumulates guaranteed cash values
  • The growth in cash values is tax-deferred under current federal income tax law
  • You may borrow against the cash value as a policy loan at the current policy loan interest rate
  • Borrowed amounts reduce the death benefit and cash surrender value
  • Amounts withdrawn that exceed the cost basis of the policy are federally income taxable

Dividends:

  • Term life insurance does not earn dividends
  • Permanent life insurance policies may be eligible for dividends
  • Dividends are a return of premium and are based on actual mortality, expense, and investment experience of the company
  • Dividends are not guaranteed, since actual experience is not known in advance

Net Cost of Insurance:

You can compare permanent life insurance and term life insurance by taking into consideration both the premium payment and the guaranteed cash value. This comparison is referred to as the Net Cost of Insurance.

Total Premiums Paid – Guaranteed Cash Value = Net Cost of Insurance

As an example, compare a term life insurance policy with a permanent life insurance policy over a 20 year period.

Total Premiums Paid

–

Guaranteed Cash Value

=

Net Cost of Insurance

Term1

$4,540

$0

$4,540

Permanent2

$29,200

$26,883

$2,317

1Select Term-20 policy — 35 year old male, non-tobacco, $100,000 worth of coverage

2Whole Life Policy — 35 year old male, non-tobacco, $100,000 worth of coverage

(Note: These figures do not recognize that, because of interest, a dollar in the future has less value than a dollar today.)

Duration of Coverage

If your need for life insurance is to provide protection for a specific period of time, like providing protection for educational expenses in the event of your premature death, then you may want to consider term insurance. Other examples of temporary needs are:

  • Use of death benefit to pay off home mortgage
  • Use of death benefit to pay off an automobile loan

If your need for life insurance is long term, such as paying bills at death or providing money for your loved ones, then you may want to consider permanent insurance. Other examples of permanent needs are:

  • Use of death benefit to pay final expenses
  • Use of death benefit to provide money for a favorite charity
  • Use of death benefit to pay estate taxes
  • Fund a business buy/sell agreement or provide key person protection

Note: The longer period of time that insurance protection is needed, the more consideration you should give to permanent life insurance.