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For people who may be interested in a greater degree of life insurance coverage, whether through their employer or independently, there are two main types of insurance offerings that they’re likely to encounter: term life insurance and permanent life insurance.When it comes to life insurance, there is a sizable market for both private market solutions targeting individual policyholders as well as group insurance offerings through employers.
In fact, according to a 2018 report from the Society for Human Resource Management, 85% of companies offer some form of voluntary group coverage for employees, with even more companies providing 1 year’s salary to an employee’s family in the event of their untimely death with no outside insurance policy in place.
Those considering life insurance coverage should understand the differences between term life insurance and permanent life insurance, as well as the pros and cons of each.
The most common type of life insurance, term life insurance policies are also probably the simplest type of life insurance policies to understand. Policyholders pay a fixed premium for a predetermined number of years during which the policy is active. For example, some policies run for 10 years, some policies may run for 30 years.
If a policyholder dies during the term while the policy is still active, then the policyholder’s heirs are paid a death benefit of a predetermined lump sum.
There are often some limitations to term life insurance depending on the policy, such as suicide for example. Furthermore, the amount of the lump sum may vary from policy to policy depending on the cost of the premiums and the policyholder’s age and health at the time the policy was written.
Term life insurance is almost certainly the cheapest form of life insurance that one can buy with regard to the premium cost over death benefit ratio.
If a policyholder outlives the term of their policy, the policy will expire without having paid any death benefit or any other financial benefit. The policyholder and/or their potential heirs may find themselves wondering why they were paying a premium every month for so many years only to ultimately find themselves with nothing to show for it.
If the goal when initially acquiring a term life insurance policy was to hedge against the risk of a policyholder’s untimely death during their prime earning years when they typically have more dependents directly relying upon their salary, then that goal has been accomplished in the event that a policyholder has survived through an insurance term that has now stretched into the policyholder’s retirement.
Further, with the relative affordability of the premiums along the way, the policyholder has had the opportunity to invest for their own retirement needs unrelated to an insurance policy, in addition to hopefully providing ample time for their dependents to become more independent over the course of the term.
Unlike term life insurance which expires after a set term or number of years, permanent life insurance is designed to pay out a death benefit in almost all cases, so long as the premium payments are paid and the policy remains active, whether the policyholder dies 1 year or 100 years after initiating the policy.
While these calculations can be significantly more complicated than with term life policies, there are 3 primary types of permanent life insurance worth considering for prospective policyholders:
The most common type of permanent life insurance is whole life insurance. Whole life has some features in common with term life insurance, such as fixed premium amounts and fixed death benefits. However, the most glaring difference between the two options is that whole life insurance does not have a set term at which the policies are terminated with no benefits paid to the policyholders.
Instead, whole life insurance policies will only require premiums to be paid for a predetermined number of years or until the policyholder reaches a certain age – typically when the cash account and death benefit are equal. At that point, the policy is deemed to have reached maturation and will be paid out to the policyholder and then canceled.
Unless a whole life insurance policy reaches maturation first, as long as premiums are paid and the policy is kept active, a whole life policy will be with a policyholder for their whole life.
In addition to covering the costs of providing the insurance, including administration fees as well as contributions to the death benefit pool, premiums paid for whole life insurance policies also set aside a certain amount of money collected from each premium and put that money into a cash account that grows at a fixed interest rate outlined in the policy itself.
This cash account has tax benefits, can be borrowed against for policyholders in need of a loan, and can be accessed by policyholders early by paying a surrender fee prior to their death in the event that a policyholder wishes to cancel the policy and relinquish a potential death benefit. It can also be used to pay premiums if needed, or can simply increase over time the total value of the death benefit to ultimately be paid out when the policyholder dies.
Because whole life insurance provides guaranteed death benefits in addition to serving as a hybrid-investment vehicle, the premiums can be quite expensive, especially when compared with term life premiums.
Further, the cash account usually earns interest at a lower rate than can be achieved via other investment alternatives. Plus, the interest for loans backed by the cash account can be quite high, and so can the penalties and fees for accessing the cash account directly.
Whether or not whole life insurance is the right choice really depends on the needs of a prospective policyholder.
Most of the benefits from such a policy can be more efficiently achieved through other investment opportunities, but a given policyholder may see an advantage to the “forced” savings that come with the high premium price and cash account.
Also, the security that can come with a guaranteed death benefit can be appealing to would-be policyholders with certain considerations in mind, even if other, albeit riskier options could have led to greater potential outcomes overall.
The second type of permanent life insurance to consider is universal life insurance. While similar to whole life insurance policies in that both types of policies have no set term at which they expire and both collect a portion of premium payments into a cash account, universal life insurance (also called adjustable life insurance) sets itself apart by virtue of its flexibility.
Universal life insurance policies allow policyholders to choose within a given range how much they want to be paying in premiums at a given time and how much the ultimate death benefit amount will be.
Like whole life policies, cash accounts will be set aside that policyholders can borrow against with the cash account serving as loan collateral.
Unlike whole life policies, however, the interest rate associated with universal life insurance cash accounts isn’t fixed but is indexed or pegged to market rates. This can be a significant benefit when interest rates are high.
Further, not only can policyholders pay premiums out of their cash account similar to whole life policies, but the flexibility of universal life policies lets policyholders choose to pay lower premiums within a range and adjust their ultimate death benefit amount down if their financial situation makes it hard to keep up with premiums.
Perhaps the most important point of distinction from whole life policies is that the death benefits and cash accounts from universal life policies can never both be obtained by a policyholder. It’s either one or the other that will ultimately be paid out. In some cases, neither will be paid if the value of both is depleted by the policyholder.
In the event that a policyholder dies, the remainder of the death benefit (minus the amount of any outstanding loans, etc.) will be paid to beneficiaries, but the remainder of the cash account will go to the insurance provider.
Alternatively, if the policyholder seeks to liquidate the cash account before their death (while paying an often-substantial fee to do so), then the policy will be cancelled and no death benefit will be paid out upon their demise.
Finally, in what may be the least favorable outcome from a policyholder’s perspective, it’s also entirely possible that a policyholder or the policy itself may reach the maturation age only after the cash account has been depleted so that there is little or no remaining cash. At this point, whatever is left in the cash account will be paid out and the policy will be terminated.
The flexibility that can come with universal life policies can be appealing for some people who may be considering a permanent life insurance policy.
However, without set interest rates, premiums, and death benefits, in addition to minimum premium payment amounts that grow over time, the uncertainty that accompanies these flexibilities can lead to less risk reduction than might be preferred by someone seeking out insurance for risk mitigation purposes.
Much simpler than whole life and universal life policies, guaranteed life insurance much more closely resembles term life insurance, with the most important distinction being that the set term is the remainder of the policyholder’s life – however long that may be.
With no variable premiums, interest rates, or death benefit adjustments to worry about, guaranteed life insurance policyholders will pay a set amount in premiums for the remainder of their life. At the end of their life, a predetermined death benefit will be paid to their beneficiaries. It’s pretty much as simple as that.
Since there are no cash accounts and maturity dates, and since there is no telling how long a given policyholder will live, it’s entirely possible that a policyholder who lives a very long time will pay out more in premiums than their beneficiaries will receive in death benefits.
It’s also possible that a policyholder who lives longer than anticipated will not be able to keep up with the premiums, even at a fixed rate, during their later years. At that point, a lapse in premium payment would lead to a cancellation of the policy with no benefit paid to the policyholder or their heirs whatsoever.
For those would-be policyholders who seek the apparent certainty of permanent life insurance with both fixed premiums and fixed death benefits, while the only real uncertainty is in regard to the length of a policyholder’s life and their ability to keep up with premiums throughout, this is a policy that is certainly worthy of consideration.
According to a 2018 report from the Life Insurance Market Research Association, about 60% of Americans are covered by some form of life insurance, with about 20% of those policyholders wishing they had even more coverage.
Further, nearly half of all adults searched online for information about life insurance in 2018, with close to a third of those searchers taking additional steps toward ultimately purchasing new life insurance policies.
Contemplating one’s own mortality and considering a world in which they no longer exist (in a physical sense anyway) can be an uncomfortable exercise for many people that often leads them to avoid making preparations for the inevitable, such as buying life insurance, estate planning, and generally getting their affairs in order.
Despite that discomfort, however, the rate at which Americans are purchasing life insurance coverage is certainly at least some indication that the desire to ensure that the people one leaves behind are well taken care of after they’re gone may be a more powerful motivator than the fear of death itself.
According to a report by Gettysburg College, the average person spends about 90,000 hours at work over the course of a lifetime. With the exception of those who are lucky enough to have such passion for their occupation that they would happily do it for free, it’s a fair assumption that most people trade so much of their time and labor in exchange for compensation because they need the money.
Still, despite dedicating such a substantial portion of their waking hours to their jobs, nearly half of all American retirees die with less than $10,000 in savings, according to The Motley Fool.
Given how difficult accumulating savings can be, having a life insurance policy can be a great way to ensure that your loved ones are well looked after in the event of your death.
However, as the previous paragraphs have likely shown, this can be a more complicated endeavor than it may seem on the surface, with many different considerations that should be taken into account for each individual policy seeker.
In order to best navigate the many-faceted complications of the life insurance industry, whether independently or through an employer, the smartest way to proceed is by consulting with a broker who can identify the policy most in line with both the individual circumstances as well as the goals of a prospective policyholder.
Mployer Advisor can help you find a broker who can answer any questions you may have about what type of life insurance is best for you or your employees. Easily search for life insurance brokers in your area, read through reviews, browse independent ratings, and compare top-rated brokers.
Start your search today with Mployer Advisor.See Life Insurance Brokers Near You
At Mployer Advisor, our focus is creating transparency in the insurance and insurance broker, consultant and advisor space to the advantage of the employer. Analytics is our core and we will bring to light new information, tools and resources to aid employers in making more cost-effective decisions. As a phase I, we are here to help employers find the right broker or consultant and the right insurance company for them. Giving choice and initial transparency is a first step in creating an employer centric insurance marketplace.
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