Insurance and Finance

Life Insurance Options Explained

By Casey Kelly-Barton 9.1.17

If you’re confused about life insurance, you’re not alone. Many adult Texans do not have life insurance, even though just about everyone needs it to support their dependents and cover funeral costs. Agents say people sometimes avoid buying life insurance because learning the details about term and whole-life policies can feel overwhelming if you don’t know the basics of what they are, what they do, and when they’re the right choice.

“Leasing” Your Policy

“I like to tell people that term is like leasing a house,” Texas Farm Bureau Insurance Agent Joe Flores of Midland says. “You have it until the lease is up, but when the lease is up, it’s up.” Buying a whole-life, or permanent, policy is “like buying a home. It’s yours.” 

Term-life policies offer coverage for a term you choose when you buy the policy. That term is usually 10, 20, or 30 years. At the end of your term, your coverage ends, and although you’re no longer paying premiums, you’re also not getting that money back (unless you choose to pay more for a “return of premium” policy when you start coverage).

Depending on the type of policy you choose, you may be able to convert your term coverage to permanent coverage or extend your term coverage past the original expiration date, but these options cost more than standard term premiums. Buying a brand-new term policy at an advanced age can be very expensive, or even impossible, depending on your health and finances.

A Policy for Life

Permanent, whole-life policies, on the other hand, don’t expire. That means you never have to go looking for new coverage as you age. These policies cost more than term insurance, and some personal finance experts discourage people from buying whole-life policies because they say the money would generate a better return if it were invested in the stock market.

Flores points out that investing and insurance have different aims. He says the premiums you pay for permanent coverage “may not grow as fast as some other types of investments, but your heirs get a nontaxable lump sum when you pass away. Permanent insurance can be a supplement to your retirement income if you need it, but at the end of the day, it’s insurance.”

A benefit of permanent life insurance, compared with term, is that you can borrow from the cash value of your whole-life policy, and unlike the sale of investments, this borrowing is not taxed. (Of course, you do have to pay the policy back, and there is an interest charge, although it’s often offset by the increase in the policy’s value over time.)

So Which Should I Get?

Most people who buy life insurance purchase a term policy, Flores said, because term “protects you for a certain amount of time — usually while your kids are growing up — at a low cost,” by replacing the income that’s lost if you pass away. The standard recommendation is to choose a coverage amount equal to 10 times your annual income. “That way your spouse can reinvest some of that money and raise your family at the same standard of living you had before.”

Parents aren’t the only people who can benefit from a term-life policy. “Even if you’re single or childless, you may have someone else who depends on you, whether that’s a parent or a sibling or another relative,” Flores says. A term-life payout can ensure that they’re taken care of.

Because of the relatively low cost of term life insurance, some families carry only this type of policy. But Flores recommends that everyone carry a permanent policy, too, if it’s within their budget. “When your term policy ends, you need a permanent policy [already] in place, because if you’ve become unhealthy it will preclude you from getting another insurance policy,” he says.

Flores added that although people don’t like to think about it, the average cost of a funeral is several thousand dollars. A permanent policy that covers at least that amount can spare your loved ones from financial stress while they’re in mourning. If you can only afford one policy right now, Flores recommends term. Then get whole-life coverage when your budget allows.

When Should I Get a Policy?

The best time to get your coverage is as soon as you can afford it, because the younger and healthier you are when you start coverage, the lower your premiums will be. The ideal time, Flores says, is when you’re in your 20s. “You’re going to save a lot of money by buying when you’re young,” Flores says. You can usually find coverage at any age, but premiums rise along with age.

No matter when you buy your policy or which type you have, Flores recommends reviewing your coverage with your Agent “at least every two to three years. As your life changes, your coverage needs may change.” By getting coverage now and keeping it up-to-date, you’ll be giving your family financial security and peace of mind for the long run.

Read the story of loss that a Texas Farm Bureau member shared in order to help answer the tough questions about life insurance. 

Coverage and discounts are subject to qualifications and policy terms and may vary by situation. Life insurance products are offered through Southern Farm Bureau Life Insurance Company. 

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