06/14/23
What’s the best type of life insurance for you? To answer this, we need to re-adjust our approach to the different types of life insurance.
There’s only one ‘type’ of life insurance – the type that pays a death benefit upon your death. The payment in the event of your death is the product that you’re purchasing when you obtain a life insurance police. The traditional way of defining types (term, whole life, universal life, etc) doesn’t differentiate the product – the death benefit. If you purchase $500,000 of any of the traditional types and pass away, they all pay the same $500,00.
The correct way to look at types is by how the premiums are structured – or, the cost of the insurance. But it’s not just the initial premium, because then the cheapest would be the best. Instead, what gives us the actual different types of life insurance is the cost structure over long periods of time. In other words, look at how the premiums are structured over time to get the different types.
A comparison would be if you were purchasing a car – but with the limitation that we all have to buy the very same car (or, in the case of life insurance, we’re purchasing the death benefit coverage). Our choice of the different ‘types’ of car are now just our choice of payment structures. We can purchase outright, we can take a car loan, or we can lease. Now what’s the best type of car? It’ll be the cheapest financing option for our circumstances. It’s the same thing with life insurance.
Life insurance costs have increase as we get older. The insurance industry however manipulates the base cost of policies over the years to give us these different types. If premiums are inexpensive now, but get more expensive as we get older, that type of life insurance is called term life insurance. If instead the life companies adjust the premium structure to have level premiums for life (by increasing the initial premiums and decreasing future premiums over our life), this is called permanent life insurance. Term insurance – cheaper now, more expensive later; permanent insurance – more expensive now, cheaper over the long term.
The best type of life insurance generally will be the cheapest insurance over the time frame that we need it for. If we need life insurance for a specific period of time (and therefore assume that we don’t need life insurance after that time) then the cheapest..and the best type of life insurance will be the insurance that is cheaper now but more expensive later – and that’s term life insurance. When it gets expensive later, that’s fine because we are assuming that we don’t need the life insurance at that time in the future.
For most people looking to provide for their families, we’re not insuring our life directly. Instead, we’re financially protecting a part of our income. Our income drives our family’s lifestyle and if we protect our income using life insurance then we have protected our family’s lifestyle in the event of our death. And since our income only lasts until retirement, we assume then that we only need life insurance until about that time. That gives us a specific timeframe that we need life insurance for – and thus, term insurance will be the cheapest type of life insurance over that time. To be clear, that’s because we’re assuming that we don’t need life insurance (or certainly not as much as we do when we’re young) when we’re 90 years old – we need it primarily until about retirement.
Therefore, the best type of life insurance for most of us will be term life insurance.
Term life insurance has premiums that increase over time, but are guaranteed level for some number of years at the start of the policy. The number of years that the premiums are level for at the start of the policy is called the term. Commonly available terms are 10, 15,20,25 and 30 years.
At the end of the term, most policies will remain in force but continue at much higher premiums. This is called the renewal. Renewals are generally expensive and too high to be sustainable financially for long, so you should assume at the end of the term that you’ll be cancelling the coverage.
You should choose a term that best matches the timeframe you have until retirement. That gives you level premiums until that time, after which time we assume that you’ll cancel the insurance (because you’re retired, and no longer need to protect your income). So, if you’re 45 and planning on retiring around 65, then a 20 year term would be the best policy. If you’re 55 and planning on retiring at 65, then a 10 year term would be the cheapest coverage over that 10 years, and thus the best policy.
Not all term life insurance policies are the same. Some policies have policy benefits and features that can add substantially to the value of the coverage.
Renewable and convertible term insurance are term policies that continue past the end of the initial term, at a higher premium. This means that at the end of the term – perhaps 20 years from now – if for some reason you wanted to continue your life insurance for a period of time (e.g. if you became uninsurable in the future) then you have that choice. Term policies that are not renewable and convertible simply expire at the end of the term – the insurance is over and if you’re uninsurable, then you can’t obtain more coverage. The convertible part of this benefit allows you to exchange your term policy for a permanent policy without any medical history questions. That means that even if you become completely uninsurable, the convertible benefit lets you switch to permanent life insurance. Policies that are not convertible provide you no further options should you become uninsurable.
You should never accept a policy that is not renewable and convertible unless you have no other choice – not at any price.
The exchange option lets you switch to a longer term policy, in the first 5 years of your current policy.
Pro Tip: If you’re considering a 20 or 30 year term policy, you can use the exchange option to save money! Simply purchase a 10 year term (at cheaper premiums) and then just prior to your next birthday, use the exchange option to switch to a term 20 or term 30. Result? Your premiums until your next birthday are as much as 40% cheaper! The Term Guy developed this strategy we call "Term Stacking". Wawanesa Life insurance policies are the only policies that allow for this money saving strategy.
Should you have develop limited mortality (generally less than one year) during your term policy the ADB benefit lets you apply for a percentage of your death benefit payout before you die. The amount of the ADB benefit is then subtracted from your final death benefit. This is particularly beneficial if you having a terminal condition, as it can provide you funds during your final days.
Some policies have the exchange option and ADB in different combinations. Our online term life insurance quotes allow you to compare these different benefits, by individual policy.