What Life Insurance Should I Buy?

You know you need life insurance because you have people that rely on your income, but with so many choices and different types of life insurance, what do you buy? 

I saw an article recently that indicated “analysis paralysis” caused many people to not buy it, even though they really need it, because they did not want to purchase the wrong policy. 

The way I see it, having ANY life insurance is better than having none if you have a family or business that will suffer if you die, and they lose the income you generate.  

I’ve heard all of the horror stories about people who died without having life insurance and the financial struggle that their family had to deal with afterward, and you don’t want your family to be one of these.  

If you already have pre-existing health issues like heart disease or any other issues, then having life insurance is even more important, just in case.

Your decision on what exactly to buy does not have to be perfect. You can always buy something you can afford now and then replace it with a different policy later.  

You could also convert an existing term policy later if you need or want longer coverage and if you’ve had new health issues which may prevent you from qualifying for new insurance later.   

Remember that you’ll be under NO obligation to keep any life insurance policy for any period of time.   If you bought a policy today, you could cancel it next month, in six months, one year, five years, whenever. 

If you’re like many people, the plan of life insurance you purchase may come down to what it’s going to cost. 

Below are the current best rates that are guaranteed to remain level for 1 – 35 years and the best guaranteed level for life rates available to males and females at varying ages from 45 to 70.  These are non-tobacco rates, assume good health, and are all for $250,000 of life insurance.  These are all MONTHLY rates: 

Males    Age 45     Age 50     Age 55     Age 60     Age 65      Age 70
  1 Year:   $12            $17           $22            $27          $48            $84
  5 Year:   $21            $29           $42            $66          $108          $180
10 Year:   $16            $24           $37            $61          $107          $173
15 Year:   $23            $34           $50            $83          $145          $236
20 Year:   $29            $43           $67            $113        $209          $418
25 Year:   $42            $62           $106          $179        $288          $458
30 Year:   $45            $69           $136          $219        $349          $516
35 Year:   $56            $122         $178          $262        $407          $553
Lifetime:   $145         $181         $244          $320        $427          $563 

Females  Age 45     Age 50     Age 55     Age 60     Age 65      Age 70
  1 Year:     $12          $17          $22             $27          $38           $51
  5 Year:     $18          $24           $32            $47           $67           $92
10 Year:     $14          $20           $29            $42           $66           $98
15 Year:     $18          $25           $35            $54           $93           $134
20 Year:     $21          $32           $51            $78          $129         $238
25 Year:     $31          $48           $74            $141        $238         $376
30 Year:     $33          $51           $98            $195        $287         $443
35 Year:     $44          $107         $155          $228        $312         $445
Lifetime:     $121       $157         $206          $264        $337         $449 

As you can see from above, life insurance can be very affordable.  All of the rates above are for $250,000, and rates at lower amount of insurance will be less expensive.  

All rates are based on age and health, so you should buy the longest duration coverage for the appropriate amount of life insurance that you can afford and need while you’re younger and healthier.  

Even rates for seniors can be very competitive, though, so the best thing to do is to find out what it will cost you, no matter your age.    

Most people could afford a 10 year term plan. While a 10 year term may not be the best choice, having it is better than having none at all.  

You should only consider a one year term, also called increasing premium term insurance or annual renewable term, if you only have a very short term need for the life insurance like one or two years.  This is best type of life insurance if you’re required to have it to cover a very short term loan.  If there is even a possibility that you may need the life insurance for longer than one or two years, do NOT buy a one year term policy, as the rates can increase significantly from year to year.    

I’ve also never seen a case for which buying a five year term made sense.  Everyone would be better off buying a 10 year term and cancelling it after five years if they only needed or wanted coverage for five years. 

Term insurance will cover you for a specific period of time at guaranteed level rates for the time frame you choose.  If you don’t die while the coverage is in force, you get nothing back.  After the 1 to 35 year guaranteed level premium period is over, the cost to continue most term life insurance policies will increase dramatically, and it usually won’t make sense to maintain the coverage after the level premium period has ended.     

There are also term plans that will pay you back all of the premiums you’ve paid into the policy at the end of the level term period if you’re still living.  These are called return of premium (ROP) terms, and they can cost two to three times more than regular term insurance. Some people feel it’s worth it to pay more to get something back at the end of the term.  

What I don’t like about ROP terms is that if you do die while the policy is in force, your beneficiary will only get the life insurance amount you purchased even though you’ve paid significantly more for the ROP benefit. Even though this insurance will cost you more, if you die while the policy is in force, your beneficiary won’t get any additional money back aside from the total life insurance amount.    

There are also several different types of “permanent” insurance that are all meant to provide coverage for your entire lifetime.  Some are guaranteed to provide coverage for life, and some are only projected to provide coverage for life but are not guaranteed. 

I prefer to only recommend guaranteed for life permanent insurance plans, as there is no gray area with these plans.  As long as you pay your premium, you’ll be covered for life at a rate that will never increase.  

Guaranteed universal life (GUL) insurance is currently the most inexpensive permanent life insurance that has a level rate and coverage that are both guaranteed for life as long as you pay your premium on time.  Some GUL plans will also allow you to shorten your guarantee to age 80, 85, 90, 95, etc., which can help reduce your cost.  

The “Lifetime” rates I’ve quoted above are the best GUL rates that are guaranteed to provide you coverage for life and will never increase as long as you pay your premium. 

There are also non-guaranteed universal life plans available to you, and these are not guaranteed to provide coverage for life.  These are not bad policies just because they are not guaranteed, but they do require a little more maintenance or policy review on my part as an agent or on your part as a consumer.  While your agent should monitor your policy and how it’s performing, you should also pay attention to your annual statement that the insurance company sends you each year if you have a non-guaranteed UL policy to make sure it’s performing the way you’re expecting, and so that you can make any changes to your policy if necessary.  

I may very well convert my own term insurance to a non-guaranteed universal life policy when it comes up for renewal because I’ll be highly rated or declined by most life insurance companies. The cost to convert may be better for me than a new policy may cost.  I’m comfortable with having a non-guaranteed permanent plan because this is all that my current term carrier is offering on conversion, even though a guaranteed policy would be my first choice if it was available and if the price was right.  

All permanent life insurance can build a cash value which you could use by taking loans or withdrawals against your policy, and you would also receive any cash value back if you ever cancelled your policy. 

On most permanent plans of insurance, cash value is not guaranteed and will fluctuate depending on interest rates credited to the policy. 

While there are currently a few guaranteed universal life companies that do offer some guaranteed cash value or a return of premium (ROP) option in future, traditional “Whole Life” insurance is really the only permanent policy with any significant guaranteed cash values.  

Traditional Whole Life insurance is also the most expensive form of permanent insurance because of its guaranteed cash value.  On average, Whole Life insurance will cost about 2 to 3 times more than the best guaranteed universal life insurance rates.  

While life insurance does have some tax advantages including an option to take tax free withdrawals and/or loans, I personally would not buy any policy specifically for the cash value benefit unless my 401k or any other tax deferred investments (IRA, Roth IRA, etc) were maxed out first.  My reason is that there are a lot of “hidden” charges on cash value type of life insurance policies like cost of insurance, mortality and expense charges, administrative fees, premium loads/sales charges, etc.  These charges can change in the future and could possibly negatively impact the cash value of your policy.  I’ve seen many life insurance policies not perform the way they were expected to and there have been lawsuits in the insurance industry over such issues.  

Because of the Life Settlement industry, I feel cash surrender value on permanent life insurance is less important now as statistically you may get about 10% more money by selling your life insurance policy as opposed to surrendering it.  There’s never any guarantee a life settlement offer would be made, but it is a potential option.  

If you have maximized all tax deferred investments available to you and you still have disposable income, then buying a cash value type of life insurance policy to get the tax deferred growth may be a good option for you.  

You can also “ladder” your life insurance coverage and buy more than one policy at varying duration and amounts.  I find that the majority of our clients do want some permanent life insurance, even if the permanent portion is for only $25,000 or less.  It is perfectly acceptable to buy more than one policy as it is rare that one specific policy is best for most people.     

To make your decision easier, I’d recommend that you buy the longest duration life insurance plan that you may need/want and can afford right now.  Whether it’s a 1, 10, 15, 20, 25, 30 or 35 year term, a longer duration of guaranteed universal life (i.e. 40 years, 45 years, 50 years, etc), or if you want the best rate/policy that is guaranteed for life, just buy what you can afford. Hopefully your family doesn’t collect on the life insurance anytime soon!

One more thing, don’t EVER cancel any life insurance policy until you see if it could be sold via a life settlement.   I was recently able to get a client of mine $436,000 for a $1,000,000 policy that he could no longer afford and was going to cancel.  The policy had no cash value so he would have gotten nothing back had he just cancelled it.  Everyone who has life insurance needs to be aware of the life settlement industry!