No one likes to deal with the topic of life insurance. It brings up too many realities that we all try to avoid thinking about, such as our own mortality, depressing thoughts of providing for our families if we die prematurely and lastly, money. You will die. I will die. We know this but we don’t want to consider it, at least for any prolonged period of time. When you consider that seven out of ten people are underinsured in this country you get the point that life insurance is something we just ignore or defer action on.

Like a surgeon who somehow manages to get over the site of blood in medical school, life insurance agents have somehow managed to get over the emotional part of life insurance and are able to approach the topic in a matter-of-fact, business-like way. This unemotional, analytical approach is necessary when dealing with life insurance. When you cut through the fog of emotions you are able to approach the topic in a logical manner. So let’s clear the fog for a moment and talk about your life insurance needs.

There are essentially two types of life insurance; term life insurance and permanent life insurance. Term life insurance is the least expensive because it only covers you for a set period of time. You can have a term policy, where the premium changes every year (meaning: goes up every year) or you can buy a term policy where the premium is fixed for a period of time, for example ten years. The annual premiums on these multi-year term policies are generally more expensive than the one-year term policies. Permanent life insurance polices, on the other hand, provide a death benefit for life (a/k/a for your “life expectancy”). The premiums are higher because you are locking in the cost of your life insurance for as long as you live (up to age 100). In order to lock in this cost you are obligated for the premium payment every year. Most permanent life policies are also investments, in which you build some type of cash surrender value during the life of the policy.

Clients often bristle at the idea of buying a permanent life policy over a term policy. This usually is in response to the higher premiums associated with them. My response is to ask them if they own or rent their home. Invariably most of my clients will answer that they own their home. I ask them why and they tell me because they consider it a good investment that will build equity over time. This is precisely why you should own some permanent life insurance. Think of term insurance as renting something and permanent insurance as owning something that is building value and equity. Permanent life insurance is a way of not only securing a death benefit for life but a way of building a valuable investment that will kick in when you need it, which is usually in your retirement years. You see, with term life insurance the premiums increase every year as you age. When you reach retirement age, term insurance oftentimes becomes too expensive. Granted, your life insurance needs diminish as you approach retirement age, but they do not go away. I usually have my clients combine term insurance with permanent insurance while they are younger. For example, if my clients are in their forties and have young kids, I will usually fix the term period at twenty years. This insurance serves a very specific purpose, to replace the income of a breadwinner, in the event they prematurely pass away during their earning years. This term will make up about 60-75% of their total life insurance needs. I will add a permanent life policy for the remaining 25-40%. After the twenty years is up and my clients enter their retirement years, they will have built up some cash surrender value, which they can then borrow against, tax-free, to help supplement their retirement needs. Best of all, the permanent life insurance death benefit is still there, so if either spouse dies, the surviving spouse not only has enough money to pay for the ever increasing funeral costs, but also enough to help supplement their retirement needs.

The most common type of permanent life insurance policy is called “Whole Life”. Whole Life is a fixed premium product that covers an individual until age 100. If a person lives until age 100, they are considered “dead” by the insurance company, and will be paid the face amount of their policy at that time. Whole life policies contain insurance and cash surrender value. The cash surrender value is small in the beginning but is structured to build up over time until it equals the face amount of the policy.

Another popular type of permanent life insurance is “Universal Life”. Universal Life provides flexibility in two ways. You can increase or decrease the death benefit (face amount) and you can increase or decrease the premiums you want to pay. The policy owner can even skip premium payments as long as the policy has built up enough cash surrender value.

A third popular type of permanent life insurance is “Variable Life”. Like Whole Life, the premium is fixed, however, instead of building up cash surrender value at a pre-determined rate, part of your premium is invested in a variety of investments that might include stocks, bonds, money market accounts etc. This means that you can make or lose money just like any other investment. Thus, a distinguishing factor of Variable Life insurance is that the death benefit and investment value are not guaranteed.