The Three Flavors of Life Insurance

Turkeys trotting along pathway

Written By: Leah Chester-Davis

Life insurance isn’t always the topic of choice but it’s often an important piece to the puzzle when considering financial needs of your family. While there are numerous options depending on your circumstances, Tom Haarmann, Money Concepts financial services manager with Carolina Farm Credit, says that, generally speaking, life insurance comes in three different flavors.

Term Insurance – A term policy is going to be the cheapest policy out there, says Haarmann. It’s designed to last for a certain time period. For example, in the Farm Credit system, a farmer may take out a $500,000 loan and he or she wants to make sure the loan is covered in the event that something happens. “They are not trying to build cash. They are not trying to do any fancy things with long-term care. They are trying to cover a $500,000 debt that is to be paid off in 20 years. I’d probably recommend a 20-year term policy. If you live beyond the term, you don’t get anything back. It’s pure insurance, very cheap and easy to get.”

Whole Life Insurance – This type policy is the most expensive. The premiums are typically three to four times as much as term. Part of the premium that you pay may go toward death benefit insurance, and part may go into some kind of cash account. If the cash starts increasing in the account, the selling point has always been that it is your money. You can pull that money out if you ever have a cash need. If you do it correctly, you can pull the cash out tax-free. When you have money inside of a policy, you can use it to buy a car, finance an education, supplement retirement or even set it up for long-term care.

Haarmann says that if you decide to pull the cash out, it’s important to talk with the insurance company or the agent. For the money to be tax-free, the insurance company will treat your money as if it’s a loan, as if you are borrowing your own money. You will receive an interest note payment and if you choose to disregard it the only thing that will happen is that your death benefit will start coming down. If you want to maintain that death benefit and not have it go down, then you will need to pay the interest due on that bill.

For most people, when they get to be 65, 70 or 75 years old and dependent children are on their own, they often become less concerned about the death benefit. They may choose to use accumulated cash for a supplemental retirement plan or pull the money out for some other use.

Term with Return of Premium – This third type falls between Term and Whole Life. It’s about twice as expensive as term but with a difference. With this policy, if you are still alive at the end of the term you get back most of the premiums you’ve paid. “It’s kind of a forced savings,” explains Haarmann. “That’s not a bad thing.”

Determining the best route isn’t always easy, and families with children, a mortgage and other expenses may find an insurance payment difficult. The key is to determine what is absolutely necessary to protect your family in case something happens to you. A term policy might be the best option; if you can afford more, it may be worth a look at Term with Return of Premium or a Whole Life policy.

In this 4-part series we explore considerations such as using life insurance policies for long-term care, transferring annuities into life insurance policies as a tax savings strategy, and the importance of disability insurance.


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