Small Business Questions & Answers


Filed under Running Your Business

Ask About Life Insurance

by Need A. Coach | May 24, 2012

Subject :Insurance

Dear Toolkit,

My little business is doing pretty well but I'm worried that, since I have almost all of my assets tied up in it, my young family is at risk should anything happen to me. My brother-in-law suggested that a life insurance policy might be a wise investment but, when I called a broker to inquire about one, I was confronted with a dizzying array of decisions to make. Term or cash value? Level term or variable life or universal life or decreasing term...and on and on. Help!


Need A. Coach

Dear Need,

There is no simple answer to which type of life insurance policy — term or cash value — will be better for you. If you are just starting out in life and business, and have lots of personal financial responsibilities, term insurance may be the way to go. It's relatively inexpensive and provides immediate protection so you'll be able to sleep at night. But let's examine both choices anyway.

Term insurance. Term insurance provides a death benefit only — you die within the specified term, the insurance company pays; you don't die within the term, they don't pay. Such a policy is pure protection only; it has no investment (cash value) component to it. Although it's called "term" insurance because the coverage runs for a specified term (such as a year), many modern term policies may be renewed at the option of the insured for as long as he or she is willing to pay the premiums.

While the simplest form of term must be renewed annually, term policies are now written for much longer terms (5, 10, or 15 years). Although the cost of term insurance usually rises as the insured gets older, level-term policies are also available. These policies keep the premium at the same dollar amount throughout the term (although the premium would jump more sharply for the next term than would be the case for the year-to-year rise for an annual term policy.)

But if you choose term insurance, you must remember that the policy will provide no savings for you in the future as would a cash value policy such as universal life.

Cash value insurance. There sometimes appears to be a nearly unlimited number of types of cash value policies. While they all have important differences, they all boil down to this: They provide a death benefit (term protection) and they provide for a savings feature. Cash value insurance is much more expensive than term (particularly at younger ages), but typically provides insurance throughout lifetime at a level premium. A policyholder normally can receive the benefit of these cash values during lifetime in one of two ways: (1) by taking a loan against them, or (2) by cashing in the policy (the policy will no longer be in force, but the policyholder will receive the cash surrender value).

When you are no longer strapped for cash or heavily laden with personal financial responsibilities and you can afford to think of your life insurance policies as lifetime companions, you may want to switch to cash value insurance.

If you decide to do this, you'll have a lot of choices of cash value policy types. The traditional whole life/ordinary life policies will give you a guaranteed premium amount, a guaranteed death benefit amount, and at least a guaranteed minimum build up in the policy cash values. Other, more modern cash value policies offer the possibility of greater investment returns, but these returns depend on how well the policy's individual investment fund performs.

The devilish details. You may want to take a look at a comparison of various common types of cash value and term policies. Life insurance policies are complicated things. They use terms and provisions that are nothing more than legalistic mumbo-jumbo to most of us. Added to this is the fact that there seem to be countless types and varieties of these policies.

The above link is a summary comparison of the most common forms of term, cash value, and specialized and hybrid policies in a tabular format. Although we have tried to hit the high points of the most common types of in use, please note that various insurance companies — primarily for marketing reasons — create their own names for specific variations of the general insurance types noted here.

Regardless of how well it appears that a life insurance policy performs as an investment, it is highly unlikely that purchasing it will make sense if you have no need for the additional death benefit protection. All life insurance policies — even those that emphasize the growth of cash values over death benefits — must provide for death benefits (for which a portion of your policy premium must go). If you don't need more death benefit protection, you shouldn't have to pay for it!