Considerations When Purchasing Life Insurance

Term insurance is perhaps the most common and least expensive form of life insurance — if you’re under age 50. These policies are written for a specific period of time — 1 year, 10 years, 30 years, etc. — and often have the option for renewal, during which time the premiums are likely to increase. If you wish to lock in the premium for periods of up to 30 years, select a level term policy.

Decreasing term insurance can be used to match the amortization of your mortgage principal or another financial obligation, with benefits paid only if you die during the policy’s term. While the premium remains constant over the term, its face value decreases. Once you pay off your debt, this policy expires without value—unless you choose to renew it. You can choose variations of this policy, such as one that is renewable up to age 70 and convertible to permanent insurance without undergoing a medical exam.

Whole life incorporates features of permanent protection with a savings account. You can lock in a premium rate, and part of the premium accrues a cash value as long as you continue to pay the premiums. As the savings amount increases, you can potentially borrow up to 90% of the policy’s cash value tax-free (though borrowing money reduces the policy’s death benefit and cash value).

Universal life is similar to whole life while including potentially higher earnings on the savings feature. You can also change the premium amount and withdraw cash, as well as possibly even change the face value of the policy. These also can offer a guaranteed return on cash value. However, withdrawals will be taxed.

Variable life policies generally feature fixed premiums and a flexible cash value policy. In fact, you can invest the cash value in your choice of stock, bond, or money market funding.¹ However, keep in mind that the cash value and Member FINRA/SIPC death benefit can fluctuate, too, based on the performance of your investment choice(s). There is typically a floor for death benefits but no guarantee on cash values. Additionally, fees for these policies tend to be higher than for universal life. Finally, should you accrue investment earnings, they are tax-deferred as long as the funds remain in the insurance contract.

Variable universal life allows your premiums to be invested more aggressively than with other policy types. While similar to variable life in that you can choose from a variety of investment options, there is no guarantee beyond the original face value death benefit. As such, they are more common with wealthy buyers who can withstand the risks.

Survivorship life insurance is a unique type of life insurance that insures two people under one policy, and provides a payout to their beneficiaries when both have passed away. It is typically used for estate planning, with a death benefit that can fund estate taxes while passing along wealth to future generations or a charity. This policy may be favored if one of the insured is finding it difficult to have a more traditional life insurance policy underwritten, possibly for medical reasons. However, it may not be the right policy type if one of the insured would suffer financial hardship if the other passes away first.

First-to-die life insurance is a type of policy that pays a death benefit to the surviving spouse (or other beneficiaries) after one of the policy owners dies. This is useful for covering a mortgage or other large debt where there are multiple debtors. It is often used when funding buy-sell agreements within a closely held business.