By Daniel Korleski, MBA
Note: As fiduciary advisors we only charge for the advice that we provide and do not “sell” any commission-generating products like insurance or other vehicles. We believe our clients should know exactly how much they are paying their advisors and disclose potential conflicts of interest that can be created by investment vehicles, especially annuities. If we determine that there is a need for an insurance vehicle, we will be happy to point that out and refer you to a broker that offers insurance vehicles.
Life is unpredictable, but protecting the ones you love is always a top priority. That’s where life insurance comes in—a financial safety net that can provide your loved ones with a measure of assurance in the event of the unexpected. However, with so many types of life insurance policies available, it can be difficult to know which one is right for you. From term to whole to universal policies, each has its own unique features and benefits. But fear not, we’re here to help you make sense of it all. So, whether you’re a veteran, a newlywed, a new parent, or just planning for the future, join us as we explore the world of life insurance and discover what to expect from a term, whole, or universal policy.
Term Life Insurance
Term life insurance is typically less expensive than other types of insurance. It provides coverage for a specified period of time, usually 10, 20, or 30 years. If you die during that time, your beneficiaries will receive a death benefit; if you don’t die during the term, the policy expires and you get nothing.
Because term life insurance is one of the least expensive and simplest types available, it’s an excellent choice for those who only want coverage for a specified period of time, like until your kids reach a certain age or your mortgage is paid off.
Benefits of Term Insurance
Here are a few advantages of term life insurance:
- It’s affordable: Term life insurance is very affordable, especially when compared to whole life insurance, making it an excellent option for families or individuals on a budget. What’s more, the premium is usually guaranteed to stay the same for the length of the term.
- It’s flexible: Term life insurance policies can be customized to meet your needs. You can choose the length of the term and the amount of coverage and even add riders to your policy to further customize it.
- It’s simple: Term life insurance is a very straightforward coverage—with no complicated investment components or cash value accounts to worry about.
- It’s transferable: If you no longer need term life insurance, most policies can be converted to whole life insurance or another type of permanent life insurance. This gives you the flexibility to change your coverage as your needs change.
- It’s tax-free: Death benefits from term life insurance are typically tax-free. This means your beneficiaries will receive the full amount of the death benefit without having to pay any taxes on it.
Drawbacks of Term Insurance
It’s important to keep in mind that sometimes the cheapest solution is not always the best solution. Here are some disadvantages to a term policy:
- Use it or lose it: The use-it-or-lose-it nature of a term policy is a big drawback. No one can predict their death, and with a term insurance policy there’s a strong chance you won’t pass within the specified time frame. In this case, you lose the death benefit and all the premiums you’ve paid over the years. How much could that money be worth if it was invested in the market or in an insurance policy with a cash value?
- Premium increases: Though the premiums are usually guaranteed during the first term, they can increase exponentially when it comes time to renew. This is especially true if you are past the age of 60 or have experienced any changes in health that may make evidence of insurability a requirement.
- Financial ratings: Because term policies can last up to 30 years, it is crucial that you thoroughly vet the companies you insure with. This includes researching the financial ratings and overall health of the company. The last thing you want is to make it 20 years into a 30-year policy and have the company go bankrupt.
Permanent Life Insurance
Permanent life insurance is more expensive than term life insurance because it covers you for your entire life. As long as you pay the premiums, your beneficiaries will receive a death benefit when you die.
Permanent life insurance also has an investment component known as cash value. This cash value grows over time and can be used to help pay premiums or it can be borrowed against in case of an emergency. There are two main types of permanent life insurance: whole and universal.
Whole Life Insurance
Whole life insurance has a guaranteed death benefit and coverage that applies as long as your premiums are paid. Coverage will not decrease or be revoked, and premiums will not increase or decrease over the life of the policy.
Coverage can increase based on increases in cash value or reinvestment of dividends, but it will never decrease below the guaranteed value. The growth of the cash value can be based on a fixed rate of interest or it can be variable. The cash value will grow on a tax-deferred basis, but once money is withdrawn from the policy, any earnings will be taxable as ordinary income.
Universal Life Insurance
Universal life insurance is another type of permanent, but it has a flexible premium and death benefit. The premium is usually lower than whole life, but the policy usually comes with fewer guarantees.
With this type of insurance, policyholders can choose how their premium payments are invested, which can provide significant growth potential for the cash value of the policy. It is also riskier than whole life because major investment declines could cause your premium payment to go up next month in order to keep the policy in force.
Generally, universal life policies are recommended for those who have a higher risk tolerance and want a greater degree of control over their insurance investments.
Benefits of Permanent Life Insurance
Permanent life insurance, whether whole or universal, is an excellent alternative for those seeking long-term financial stability. Here are a few of its benefits:
- Death benefit protection: One of the primary reasons why people purchase life insurance is to provide financial protection for their loved ones in the event of their death. Permanent life insurance policies offer this same death benefit protection but on a much longer-term basis than traditional term life insurance policies.
- Flexible premium payments (universal): Another key advantage of permanent life insurance is that it offers policyholders the flexibility to make premium payments that fit their budget and needs. This can be especially beneficial for those who have unexpected changes in their income or cash flow.
- Tax-deferred growth: Another significant benefit of permanent life insurance is that the policy’s cash value grows on a tax-deferred basis. This means you will not have to pay taxes on any of the growth in your policy’s cash value until you withdraw the money.
- Access to cash value: One of the best features of permanent life insurance is that it allows policyholders to access their policy’s cash value for various purposes. Some people use this money to help cover unexpected expenses, while others use it to supplement their retirement income.
- Greater investment control: Both whole and universal policies offer a greater degree of investment control since policyholders are allowed to choose how their premium payments are invested.
Drawbacks of Permanent Life Insurance
Some of the downsides of permanent life insurance include:
- It’s expensive: Permanent life insurance policies are much more expensive than term policies. Not only are you paying for the life insurance coverage, but a portion of your premium is also being invested as part of the cash value. It is essentially “forced savings.” If you do not need additional savings, or simply can’t afford it, permanent life insurance may not be the right choice for you.
- It’s complicated: There’s a lot that goes into a permanent policy, especially when it comes to the investment component. Policyholders will need to choose their investments and pay close attention to the policy’s terms and conditions about interest rate. If you have a variable policy, your interest rate will often be capped at a certain level, which can make it less desirable than just investing in the open market.
- Greater risk exposure (universal): Universal policies, especially the variable policies, can expose your cash value to a greater degree of risk than other permanent life insurance policies. This is because the interest rate is not guaranteed, meaning negative market returns could cause your cash value to decline.
Looking for Answers to Your Questions?
Insurance is like a safety net, protecting you and your loved ones from the unexpected. As the old adage goes, “Better safe than sorry.” Whether you’re in the market for term or permanent insurance, it’s essential to understand your options and select the right coverage that fits your unique needs. By putting reliable coverage in place, you can have peace and confidence knowing you and your loved ones are shielded from life’s uncertainties. So, why wait? Don’t hesitate to reach out to me at danielkorleski@cobaltprivatewealth.com or 719-332-3863 to schedule a meeting.
About Dan
Daniel Korleski is the President & CEO for Cobalt Private Wealth, where he helps his clients grow, manage, and protect their wealth so they can work toward a stronger financial future. With over 30 years of experience in the financial services industry, Dan has served as the managing director for Investment Trust Company, chief investment officer for the Wealth Management Group at American National Bank in Denver, and regional investment manager for the Greater Colorado Region of the Private Bank at Wells Fargo, where he oversaw the management of over $2 billion. In 2008, he was appointed by the mayor of Colorado Springs to the City’s Investment Advisory Committee. Dan holds an MBA in investment management from Midwestern State University in Wichita Falls, Texas, a Bachelor of Science in Finance from Florida State University, and is a member of both the CFA Society Colorado and The Financial Planning Association.
Dan loves to give of his time to his community and is currently serving as the Board Chair of Catholic Charities of Central Colorado and oversees the Homebound Ministry at St. Paul Catholic Church. He has also served as Chair of the Board of Trustees of Pikes Peak Hospice Foundation, President of the Broadmoor Rotary Club, and Vice President of the Board for the Pikes Peak Chapter of Trout Unlimited. Dan was born and raised in Spain and is fluent in Spanish. When he’s not working, you can find him traveling around the world with his wife of 25 years, Montse, fly fishing, golfing, and hiking with his rescue pup Brandy and Golden Retriever Quique. To learn more about Dan, connect with him on LinkedIn.
