A Primer on the Different Types of Life Insurance

As you age, your life insurance needs will change. Sometimes you may want to consider temporary or permanent insurance. Let’s explore both types.

Temporary

Temporary life insurance expires without value after a specified term. This is ideal if you’re younger and have financial obligations, like a family or mortgage. This type of protection is often called term life insurance. Typical terms are 10 years, 20 years, 30 years, to age 65 or 75.

Premiums are usually level during the term, which is good for budgeting. What happens if your need lasts longer than you anticipated?

Renewable – Most temporary life policies have level premiums and are renewable at the end of each term until coverage expires at a maximum age like 85. Suppose you bought term 10 (coverage that lasts for 10 years). After 10 years, you might want to continue your coverage. The rates jump at each renewal but are usually guaranteed and shown in your insurance contract. If you’re healthy, you can often save by applying for new term insurance instead of renewing.

Convertible – Regardless of your health, you can usually convert temporary coverage to permanent life insurance before you reach a maximum age like 65 or 70.

Permanent

Permanent life insurance lasts your entire life, provided you keep paying the premiums. This type of protection is ideal for estate planning. There are three main forms:

Term to 100 – this product generally has guaranteed level premiums to age 100. That’s when your premiums stop but your coverage continues.

Whole life insurance – this old style of product predates smartphones and even personal computers. It combines life insurance with tax-sheltered savings. A portion of your premium for the year covers expenses and another portion covers the insurance charges. The balance gets invested by the insurance company but you have no say in the investment choices.

Some plans give you a partial refund of your premiums (called a dividend) but dividends aren’t guaranteed.

Universal life insurance – this is the most flexible, most guaranteed and most transparent form of permanent insurance. It’s like a bank account into which your premiums get deposited. Each month, withdrawals are made for insurance charges and administration charges. However, you get to choose the investment options.

Unlike whole life, the mortality rates and expenses are typically guaranteed for life. The investment returns are not, though there may be minimum guarantees on fixed interest investments.

Getting started

Since you have many choices, a good starting point is to decide whether your foreseeable needs are temporary or permanent. An advisor might encourage you to buy some permanent life insurance for estate planning, which is likely decades away, and put the balance in temporary insurance. This may not be a wise choice since permanent insurance is initially more expensive and he odds of you having a disability during your working life are higher than the odds of you dying prematurely. Purchasing permanent insurance means you’ll have less money for income replacement insurance (disability insurance) and critical illness insurance.

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