"Cheap" Term versus Whole Life: Find the
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The main types of life insurance

Life insurance may seem difficult to understand, but at the very basic level there are only three kinds of insurance, Term, Whole Life, and Universal Life. All modified plans are simply variations on one of the three.

Term Insurance—rates are inexpensive in the short run

Many people purchase Term life because it seems the easiest to understand, although it may not always be the best type for them. Term is simply life insurance that pays a death benefit if you die within the time limit of the policy, usually 20 years. The premium and the death benefit stay the same for the initial term after which the premium increases sharply. The policy has no cash value; it simply provides coverage, meaning that if you let it lapse, you have no refund or surrender value coming to you.

You shouldn't purchase Term insurance if....

• You want something that will last your entire life, providing a way to pay final expenses, leave a legacy to your heirs, or pay taxes on an estate.
  

• You want something that could be borrowed against or converted for additional retirement benefits later in life. Term has no cash value.

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Whole Life for your entire life

Whole life insurance is insurance that covers you with a level premium for as long as you live. Newer policies, however, actually cover you to age 120 although you only pay premiums to age 100. If you decide you don’t need the coverage, the policy will have cash that you can convert to an annuity, a paid up policy, or that you can simply “cash in.”

Universal Life—a blend of Term and Whole Life

People often think Universal life is confusing and uncertain, but it actually captures the best features of both Term and Whole life. It could be funded like a term and simply allowed to lapse when you no longer needed it, or it could be funded in such a way as to last as long as you live. Universal life is a policy with two components—a savings component and a life insurance component. The savings component grows based on current interest rates which can fluctuate, but cannot drop below a guaranteed rate. The life insurance is funded from the savings account. If funded properly, savings account should be able to both grow and pay the cost of the life insurance. Also, since the savings is actually yours, you can make withdrawals from it if you have an emergency. Universal life is usually less expensive than whole life, but more expensive than Term and provides options of both.

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Be Informed

Before purchasing life insurance through the mail, allow an insurance professional to verify that it is the type of insurance that fits your needs. Most insurance policies advertised in your mail box are either Term life or graded policies. Graded policies are usually whole life, but pay limited benefits during the first two or three years, and are much more expensive than other types of insurance. Term policies can be deceptive because they may say that they are “renewable to age 95,” implying that they will last most of your life. However, the premium will increase astronomically after the initial time period, making it impossible for a person to keep it. Others increase in five year age bands and then expire altogether at some advanced age—often 85.

The best way to choose life insurance is to sit down with a licensed agent who can both analyze your situation and can explain the options available to you. A good agent will then also be available to you after the policy is issued and will both service your policy and answer any questions you or your family may have in the future.