How to Choose a Life Insurance Policy

Retirement planning covers a variety of different areas, from 401(k) plans to estate planning. Navigating this complex area on your own can be a challenge, so it is beneficial to seek out the services of an experienced financial planner, particularly one who is knowledgeable about retirement. One aspect of retirement planning that is sometimes overlooked is life insurance. Many different types of life insurance plans are available, and the one you choose will depend on a variety of factors specific to your situation. Today, the two most popular types of life insurance are term life insurance and whole life insurance. When considering which type of plan is right for you, there are a few things you should consider:

Term Life Insurance

A popular option, term life insurance is cheaper and often easier to understand than others. The reason is because it is simple and straightforward, without any accompanying extras. Term life insurance, as its name suggests, refers to life insurance designed to cover a specific term or period of time. Due to the simplicity of these plans and the limitation of the term, they are less expensive than whole life insurance policies. The purpose of a term life insurance policy is to provide a death benefit for your beneficiaries in the event that you pass away during the term. If for some reason this does not happen, the policy will simply expire and offer no additional value. A term life insurance policy has no “cash value,” and it cannot be used as a way to save on taxes or to build wealth.

Term life insurance is used to provide for your family in the event that you should die prematurely. For example, you might choose to take out a term life insurance policy that would cover the amount of time until your children finish college and enter the workforce so that they could be protected financially if you should die before them. By the time a term life insurance policy expires, many people would be in a position where they would not need it anymore. It may seem to some as though they have spent a large amount of money simply for their own peace of mind.

Whole Life Insurance

Another popular type of life insurance is known as “whole life insurance,” and this type of policy can offer a great deal more in terms of benefits than a simple term life insurance policy. The biggest difference between a whole life insurance policy and a term life insurance policy is that a whole life insurance policy will not expire, and will cover you for your “whole life”, so long as you continue to make premium payments. Whole life insurance policies can also provide cash value separate from the death benefit that can be used for other purposes.

Typically, this type of life insurance policy has a “level premium,” where you pay the same monthly amount for the duration of the policy, or for a period of years. A portion of this payment goes towards the insurance component of the policy, while the other goes toward building the cash value of your policy. Initially, and for many years, the full amount of your premium payment will likely be more than the actual cost of the life insurance. Known as “front-loading” the policy, this eventually results in a payment that would be less than what a term life insurance policy might cost for an older individual. This type of policy also allows you to make a withdrawals from the cash value of your policy. The cash value in a whole life insurance policy will grow on a tax-deferred basis, and it is possible to use occasional or regularly occurring ( once the policy has had 10-20 years to “bake”) loans on a tax free basis for various purposes, including  college tuition or costly repairs and renovations to your home, or a supplemental income in retirement. While it is usually a good idea to pay back loans, in the case of these policies, you would be taking out intentional loans that you do not intend to pay back. You would be taking out some of the growth that has occurred in the policy, and would be content to leave the remaining death benefit to loved ones. 

Remember, however, that taking a withdrawal from the cash value of your policy will result in a lower death benefit, unless you pay back the full amount, which could end up causing your beneficiaries to lose out on monetary benefits. This type of policy is also significantly more expensive than a term life insurance policy, sometimes as much as 15 times the cost of a term life insurance policy. This can make keeping up with the payments challenging for many people, but those much higher payments are also intentional, as cash value life insurance has a number of tax-free benefits that other financial vehicles do not offer.  Also, whole life policies do not have the income or contribution limits that ROTH IRAs have.

Stopping payment on a whole life insurance policy is more complex than doing so on a term life insurance policy. With term life insurance, you can simply stop making payments and allow the policy to lapse. But a whole life insurance policy often comes with a surrender charge of as much as 10% of the cash value, which will decrease over the years. It is also possible to keep the policy in place without paying more premiums, making it a “reduced paid up” policy.

A professional financial advisor can help you to weigh the benefits and disadvantages of life insurance policies so that you can choose the right plan for yourself. Take the time to consider which life insurance policy best fits your needs.


Robert Ryerson

Although Robert M. Ryerson completed all the necessary requirements to earn bachelor of arts degrees in both English and economics at Rutgers University, college policy at the time prohibited the issuance of dual degrees. As a result, he graduated from Rutgers with a single bachelor of arts in economics before finding employment as a stockbroker with Shearson Lehman Brothers in New York City. Robert M. Ryerson has since established himself as a respected estate administrator and legacy planner. In addition to his degree from Rutgers, Mr. Ryerson holds professional designations as both a Certified Identity Theft Risk Management Specialist. He has shared his knowledge on the subject of identity theft as the author of the book What’s The Deal With Identity Theft?: A Plain-English Look at Our Fastest Growing Crime. He has also covered identity theft issues directly for students as the instructor of the adult education course Understanding Identity Theft: Our Fastest Growing Crime.

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