Buying a life insurance policy can be an important task to insure that your beneficiaries will be taken care of upon your death. Life insurance is a contract between a policy holder and an insurer that promises to pay a designated beneficiary a sum of money upon the death of said insured person.
William Grossman, agent with Health Markets in Independence, and Jeffrey Wasserman, managing director and executive vice president of Oswald Specialty Life in Cleveland, said there are multiple types of life insurance to consider.
Term life insurance covers an individual for a set period of time. These policies can go up to 30 years.
Whole life insurance, on the other hand, covers a person for their entire life.
Grossman said the difference between buying term or whole life comes down to what a person can afford.
“And I always tell people the difference between term and a permanent policy is that a term policy, honestly, is a monthly expenditure that you’re paying in case you pass away to leave to your beneficiaries,” Grossman said. “Whereas a permanent policy is asset reallocation. Because in permanent policies, you can take funds out of a policy. Some policies are structured, specifically, to grow what’s known as a cash value, especially in universal life policies. Personally, I’m not someone that values variable policies. That means that they vary and you pick things on the stock market because if you did that and the stock market did have a crash, then you would lose value of your policy.”
Wasserman said term life could be purchased in four different categories, and is based on just that term and specific period of time.
“It could be bought and locked in for pricing purposes for 10 years, for example,” he said. “And what you’re doing when you lock it in for a specific period of time, is the insurance company is guaranteeing the premium will not change for the period of the term. Whether it is a term that lasts for 10 years, or 15 years, or 20 years or 30 years. At the end of each one of those term periods, the contract between the insured and the insurance company ends, and that premium schedule ends. So after the term, the premium, if one were to renew the policy, will go up significantly.”
Grossman said it is also important to consider what your goals, priorities and needs are when deciding which kind of policy to choose. And the stage of life you are currently in is vital to making that decision.
“As we get older and the cost of insurance is higher, a senior may say, ‘My kids are now fresh out of college and they’re just starting their lives. I want to make sure they’re taken care of,”’ Grossman said. “And they’ll get a 15- or 20-year term policy, which is still going to be less than a permanent policy. They’re not looking for any cash value. But they can get more face value, which is the value of the insurance that would pay out upon death, for 15 or 20 years to leave my children. And I anticipate that in 15 or 20 years my children are going to be self-sufficient and successful. So, after that time, I don’t think that there is a necessity for that.”
Wasserman said somebody that wants long-term financial security can create that from a whole life insurance policy.
“Also, whole life insurance has a living benefit to it, whereby the money is being put into the policy in the form of a premium that not only goes toward providing financial security when one passes away, but also creates a reservoir of cash value that can be used for supplementing one’s retirement,” Wasserman said. “It could also be used to supplement or pay for children’s education. And it’s a savings vehicle that grows on a tax deferred basis. Money can be pulled out of these kinds of policies, via policy, loans, tax free. And it could be a very good form of long term wealth accumulation with a very low level of risk.”