When it comes to securing your loved ones' financial future, life insurance offers invaluable peace of mind. But within the world of life insurance, a crucial decision arises: guaranteed vs. non-guaranteed permanent life insurance policies. Both offer lifelong coverage unlike term life insurance, but differ significantly in how they accumulate cash value and guarantee payouts. Understanding these distinctions empowers you to choose the policy that best aligns with your long-term financial goals.
Decades ago, life insurance was straightforward. Mutual companies sold policies that were certain to pay out, and you could pick from three types: term, endowment, or whole life. You'd pay a guaranteed premium, and the company promised a payout when needed.
But in the 1980s, things shifted. Interest rates went up, and people started cashing in their policies to put their money into higher-earning options. Insurance companies had to adapt, so they started offering policies where the returns could go up or down.
Key Points to Remember
- Some policies last for a set time, while others could last a lifetime.
- Permanent life insurance comes in three flavors: variable, universal, and whole.
- Term life insurance typically lasts 10, 20, or 30 years.
- Life insurance payouts are usually tax-free for the recipients.
Guaranteed vs. Non-Guaranteed Policies
Nowadays, you can choose from a wider variety of life insurance, including Guaranteed and Non-Guaranteed policies. A guarandteed policy means the insurance company takes on the risk and promises a payout in return for your regular premium. If their costs go up or investments don't do well, they cover the losses.
A non-guaranteed policy means you might pay less upfront and could get better returns, but you're taking on more risk. If the investments don't perform well, you might have to pay more later on.
Short-Term Policies
Term life insurance is guaranteed. You know the premium from the start, and it's written in the policy. Some premiums increase each year, while others stay the same for a long time, like 10, 20, or 30 years, before they start going up with your age.
Long-Term Policies
Long-term coverage, like whole, universal, and variable life, can be more complex. The same policy might be guaranteed or non-guaranteed, depending on the options you choose. They show you examples of how the policy might do, but these are just guesses.
They'll show you what you might earn and what you might pay, and some even suggest you could earn as much as 7%-8% each year. But remember, these are just examples.
non-guaranteed policies might show a lower cost if things go well, but if they don't, you might end up paying more, or your coverage might end sooner than you planned.
Some long-term policies have an extra option you can buy that makes sure your policy won't end, even if the value goes down to nothing, as long as you keep paying as agreed. This option can make your premium higher and might not grow your money much, but it does give you peace of mind.
When planning for the long-term, like setting up an estate plan, it's essential to have life insurance that remains active until you're at least 95 or 100 years old.
Essential Considerations
Choosing life insurance is a significant decision that should align with your financial goals. If your main purpose is to manage risk, opting for a policy that introduces additional risk might not be the best approach.
Making an Informed Choice
Deciding between guaranteed and non-guaranteed life insurance policies involves several considerations:
Are you prepared for higher premiums?
Many who purchased universal life insurance with guaranteed rates of 5%-7% years ago didn't foresee the financial downturn in 2008 or the persistently low interest rates we see today. These policies now earn about 2%-3%, leaving policyholders, often those who are retired, with the tough choice of paying much higher premiums or forfeiting their coverage.
What's your reason for purchasing life insurance?
Insurance is a tool for timing financial support to coincide with specific life events and for transferring risks that would be too costly to handle on your own. If you're seeking the advantage of a small investment for a substantial payout, you might prefer a policy that doesn't require constant monitoring to remain valid.
Is growing the policy's cash value important to you?
Insurers often highlight the advantages of permanent life insurance, such as tax-free cash value accumulation, investment opportunities in mutual funds or index products, and the option to borrow against or withdraw a portion of the cash value. If these features appeal to you, a guaranteed policy might not be your best option.
How long will you need the insurance?
A 20- or 30-year term policy might suffice for settling a mortgage or funding your children's education. Additionally, some term policies offer the flexibility to convert to a different type of insurance. (For further details, consider reading about convertible insurance policies.)