There are several types of life insurance. Confusing, right? We’re here to make this crystal clear for you. Everyone has different circumstances, so let’s talk about what type of life insurance will be best for you.
Let’s start by defining the major types of life insurance.
Term Life Insurance
Term life insurance provides coverage at a fixed rate of payments for a limited period of time. The time often varies from 1 to 30 years. After that period expires, coverage at the previous rate of premiums is no longer guaranteed. At this point, the client must either forgo coverage or potentially obtain further coverage with different payments and/or conditions. If the life-insured client dies during the term, a death benefit will be paid to the beneficiary. Thus, this type of policy is designed only to protect dependents in case of the insured’s premature death. The policy has no other value. It is also generally the cheapest type of life insurance policy.
Whole Life Insurance
Whole life insurance remains in force for the insured’s whole life as long as they continue with the policy. In most cases, it requires premiums to be paid every year into the policy. This policy includes an investment component known as the policy’s cash value. The cash value grows slowly and is tax-deferred, meaning the client won’t pay taxes on gains while they’re accumulating. The premium remains the same for as long as the insured lives, the death benefit is guaranteed, and the cash value grows at a guaranteed rate. Money can be borrowed against the account or the policy can be surrender for cash, but the death benefit will be reduced if the policy loans aren’t repaid with interest. If the policy is surrendered, coverage ceases. Whole life insurance is generally much more expensive than term life insurance.
Universal Life Insurance
Universal life insurance is a type of permanent life insurance. The excess of premium payments above the current cost of insurance is credited to the policy’s cash value. The cash value is credited each month with interest, and the policy is debited each month by a cost of insurance (COI) charge and any other policy fees. There is usually a minimum interest outlined in the policy, but it varies depending on the current market. If there is already enough money in the policy’s cash value, premium payments may not even have to be made. The client also has flexibility in changing the amount of death benefit and premium without getting an entirely new policy.
Variable Life Insurance
Variable life insurance also guarantees a death benefit but has no cash value. However, it does have investment options. The money paid into this policy goes into investments, similar to mutual funds, with varying growth rates and/or losses depending on the market. The client can only invest in the options that the insurer provides.
Variable Universal Life Insurance
Variable universal life insurance builds a cash value and can be invested. The variable refers to the ability to invest in separate accounts whose values vary. They vary because they are invested in stock and/or bond markets. The universal refers to the flexibility the owner has in making premium payments. The premiums can vary from nothing in a given month to maximums defined by the Internal Revenue Code for life insurance.
Universal, variable, and variable universal life insurance can have great growth and carry a death benefit. However, you may want to consider investing your money elsewhere. You will have more control and options over other investments that don’t incorporate life insurance.
Term vs. Whole Life Insurance
Term life insurance is a good choice if:
- You need life insurance only to cover a certain period, such as the years you’re raising children or paying off your mortgage.
- You want the most affordable coverage.
- You think you might want permanent life insurance but can’t afford it. Most term life policies are convertible to permanent coverage. The deadline for conversion varies by policy.
Whole life insurance is a good option if:
- You want to provide money for your heirs to pay estate taxes.
- You have a lifelong dependent, such as a child with special needs.
- You want to spend your retirement savings and still leave a legacy or money for final expenses, such as funeral costs. (Beneficiaries are guaranteed a payout).
- You want to equalize inheritances. For example, if you plan to leave a business or other property to one child, you could use whole life insurance to compensate your other children.
Do you have more questions about life insurance and what is right for you? We’re more than happy to help! Contact us at (702)932-3105.
