Life has a way of reminding us of what matters most. Like getting married, having children, buying a home, starting a business. Each of these milestones brings with it a renewed awareness of the people who depend on us and the importance of protecting them financially. For many people, that awareness leads to one question: do I have the right life insurance in place?
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The answer isn’t always simple, because life insurance isn’t one-size-fits-all. There are several types of policies available, each with its own structure, cost, and long-term benefits. Understanding the differences is the first step toward making an informed decision.
Millennials
Younger adults are among the most likely to recognize that they need life insurance and among the least likely to have it. Approximately 54 million Gen Z and Millennial adults live with a life insurance coverage gap, meaning they know they need coverage or more of it but don’t yet have it. Millennials report the highest level of financial uneasiness of any generation, with more than half worrying they won’t have enough money for a comfortable retirement.
The reasons for the gap are largely practical: many younger adults overestimate the cost of coverage and haven’t yet had a conversation with a financial professional about their options. Yet the case for getting covered early is strong. Millennials typically have more years of income to protect, are more likely to have young children, and may still carry a mortgage or student loan balances. Locking in coverage, while still young and healthy, generally means lower premiums and greater long-term financial security.
Whole Life Insurance
When most people think about life insurance, they focus on term life, which offers the lowest cost and covers the insured for a fixed period, say 20 or 30 years. Certainly, term insurance can play an important role, but it may not be enough on its own for extended retirement planning.
Enter whole life insurance and some of its offshoots, which fall into the category of permanent life insurance. With whole life, a portion of your premiums are invested alongside highly rated companies and will grow on a tax-deferred basis. Some believe that whole life is for wealthier people who are doing longer term planning and want to leave a legacy, when, in reality, there are many benefits to the average investor, including fast access to cash for expenses or opportunities (typically 1-2 days) and the benefit of knowing your equity is increasing annually every year.
Whole life insurance offers three kinds of guarantees:
- Guaranteed minimum rate of return on the cash value, typically between 2% and 4%
- The guarantee that your premiums won’t increase
- A guaranteed death benefit that will never decrease
Universal Life
As noted, there are various offshoots of whole life insurance. One is universal life. Unlike traditional whole life, the cash-value component accumulates interest at rates tied to market interest rates. When rates are high, you pay lower premiums to get the same amount of cash value. However, if interest rates are low, premiums may need to increase.
Prepaid Life Insurance
Another alternative is single premium life insurance (SPLI), also known as prepaid life insurance. Instead of paying a premium in monthly or annual installments as you would with other kinds of life insurance, you pay for the policy up front to secure a death benefit when you die. As with other forms of permanent insurance, your premium funds both the death benefit and a cash value amount.
There are other vehicles which can be used to supplement your savings, such as variable life and variable-universal life. All these policies have their complexity and their value. It can be worthwhile to learn more about them from your financial professional today.
