Which Type of Life Insurance May Be Right for You?
Life insurance policies protect your family after you die. The policy provides money for the family so that they can have the money they need to pay off your final expenses or pay off their own bills and expenses when you're gone. But, what kind of life insurance should you choose?
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Term Life
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Term life insurance is the most basic type of life insurance. This type of insurance provides basic life insurance protection in exchange for a premium payment. The premiums you pay to the policy guarantee the death benefit for the entire term of the policy. If you stop paying premiums, your coverage ends. There are two basic types of term life you can buy. Annual renewable term life is life insurance with a renewable feature. Every year, the policy renews. The premium is adjusted upwards while the death benefit remains the same. This guaranteed increase in cost is because you are only paying just enough premium to support the cost of insurance for one year. Every year, you get older and thus become more expensive to insure.
Level premium term life charges a premium in excess of the premium required to pay for the death benefit for one year. The excess premium is invested and then used to hold down the future premiums so that the premiums remain level. Level premium term life is purchased for multiple years at a time. Terms normally range from five to 30 years.
Term life is ideal if you need life insurance to insure a mortgage, some other loan or you intend to save up money outside of your life insurance policy for your retirement.
Whole Life
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Whole life insurance is essentially a term life insurance policy that is extended out to your age 100. Excess premiums are collected over the cost to support a death benefit for a set number of years. Instead, premiums are dramatically increased over the pure cost of insurance. Then, those premiums are invested to hold down the future premiums, similar to level premium term. In addition to this, the insurance company builds a cash reserve. This cash reserve is a savings that offsets the payment of a future claim, the death benefit. Both the death benefit and cash value is guaranteed, and the values of both are known in any given year in advance.
Whole life is ideal if you want your life insurance policy to last until your old age, up to age 100, and you also want a cash reserve account that you can use during your lifetime for any reason.
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Variable Life
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Variable life insurance is life insurance that allows you to invest some or all of your premiums into mutual funds. Like whole life, the policy builds cash value. Unlike whole life, the cash value and death benefit are not guaranteed. The value of both is driven entirely by the investments of the policy. If some of the policy is invested in a fixed-interest account, the the policy's values will be guaranteed to the extent that the premiums are invested in the fixed account.
This type of insurance is ideal if you want higher potential cash value and death benefit than what is available with whole life; understand that you could end up with far less than a whole life policy if your investments perform poorly, and are willing to forgo the guarantees inherent in a whole life policy.
Universal Life
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Universal life insurance provides elements of term insurance and elements of both whole life and variable life. Premiums are flexible and may be changed at any time. Death benefits are also flexible and may be decreased or increased at any time. Increases in death benefits may require additional health exams and underwriting. Premiums may be invested in a fixed-interest account, mutual funds or in a proprietary company investment that pays interest based on only the upward movement of a stock market index. Universal life insurance separates the cost of insurance from the cash value account. Because of this, you take additional risks. The cost of insurance can be increased or decreased over the life of the policy. No elements of the policy are guaranteed. If the company increases the cost of the policy, your cash value could be depleted, even though your investments are performing well.
Universal life insurance is ideal if you understand the risks inherent in relying on assumed values in the universal life policy, instead of guaranteed values, and you want the flexibility in premium payments and death benefits that the policy offers.
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