Oct 12, 2019 4 min read

Life insurance falls in to two categories; long term and short term. Long-term life insurance is designed to provide money for things such as funeral bills, unpaid medical bills and estate creation. Short-term life insurance provides money to pay off mortgages, educate children, replace income and provide care for people with special needs.

Long-term life insurance goes by several names: whole life insurance, permanent life insurance, universal life insurance and variable universal life insurance. These policies differ in the types of funding vehicles used to make the polices last until the day you die, and the transfer of risk from the insurance company to the owner of the policy.

In whole life or permanent life insurance, the insurance company provides guarantees when it issues the policy. The only responsibility of the policy owner is to pay the premiums. With universal life and variable universal life insurance, the risk of the policy not lasting long term is born by the owner of the policy.

When anyone takes on risk, he or she should expect greater return for the risk taking. The risk you take when purchasing a universal life insurance policy is changing interest rates. The risk with a variable universal life insurance policy is a changing stock market. The greater return is provided if interest rates go up or the stock market increases in value. If interest rates decline or the market does not grow, your risk is the policy may not stay in force until you die or, to make sure it stays in force, you may need to increase the premium payments.

There are basically two types of short-term insurance, group term and individual term.

Group term is the type of life insurance provided by your employer or a group you belong to. It may be continued after you leave your employer or the group, but the cost may not be the same as when you were employed or a member of the group. It is not wise to rely solely on group insurance. It may not be adequate to provide all of the death benefits your family may need, and when you leave your employer or group, the cost to continue the policy may not be affordable.

Individual term insurance provides a death benefit at a level premium for a specific period of time. After that period, the policy may terminate or premiums must be increased.

Individual term insurance is the least expensive of all life insurances, but understand that 90% of all term polices never pay a benefit. When looking at term insurance, ask about the conversion privilege provided in the policy. This privilege enables you to convert your short-term policy to a long-term policy sometime in the future without having to prove you are healthy.

The most resent innovation to term insurance is called return of premium. After the term expires, the policy owner receives all of the premiums he or she paid back to them. An example: a 30-year-old man buys a $100,000, 20-year term life insurance policy and he is a nonsmoker. His premium is $734 annually for 20 years, so he pays $14,680 over the 20 years. His insurance company pays him $14,680 after 20 years. In comparison, the same person buys a traditional term policy for 20 years and his total cost is $4,440.

Whether you need short-term or long-term life insurance, some rules will always apply and should be remembered as you plan your financial future. The younger you are, the lower the cost.

Life insurance cost is based on your health status at the time of purchase. Unfortunately very few of us get healthier as we age. If cost is a deciding factor, buy the needed term insurance now, and you can change it as your financial portion improves.

Bob Hollick is a State Farm Insurance agent based in Washington.

To submit columns on financial planning, investing or business-related matters, email Rick Shrum at rshrum@observer-reporter.com.