Life insurance can be complicated. There are so many products and so many options out there that picking the policy that best suits the needs of you and your family can be difficult. Knowing and understanding the various life insurance products available on the market is essential to selecting the policy that you need.
Each form of life insurance policy has distinct advantages and disadvantages, such as higher or lower premiums, coverage limits, etc. The following is a basic breakdown of each policy type and what it has to offer:
Whole life coverage: Whole life coverage perhaps the most common form of life insurance coverage. The policy covers the insured for his or her entire life, as opposed to term life insurance, which only covers the insured for an agreed upon term.
Whole life got its start after insurance customers pressured insurers to develop a product that would offer coverage over the span of one’s entire life, rather than having coverage end at a specific date with no compensation forthcoming.
The terms of a whole life policy are relatively simple. The insurance company sets a fixed premium for the entire life of the policy, and, so long as you pay the premium, the face value of the policy will be paid out when you die or reach age 99.
Whole life policies are extremely rigid, however. If you miss a premium payment, your policy could lapse, meaning the policy is canceled and you lose all the money you put into it. Whole life polices, in general, tend to have higher premiums than other life insurance products because of their fixed rate.
There are variations of whole life policies such as limited payment whole life, which allows the insured to make big premium payments to get the policy fully paid up quickly, indeterminate premium whole life, which offers lower premiums than most whole life plans and current assumption whole life, which makes use of current interest rates to set cash value and has a varying premium rate. (The cash value of a life insurance policy is the amount you’ve paid in premiums over the cost of insurance. This money is invested into a savings account and can be borrowed against, or awarded to you if you cancel the policy).
Term life coverage: Term life insurance policies offer coverage for an agreed upon number of years, in general until age 65. However, if you outlive the length of the policy, the policy expires and you receive no cash value at the end of the policy’s term (in contrast to whole life, where you would receive the face value of the policy if you reached age 99).
Dollar for dollar, term life insurance provides the most death coverage for your premium investment, but in fact, only about one percent of term life insurance policies ever pay out because most people either outlive their policy or eventually make the switch to whole or universal life. Policy loans are also unavailable in a term life insurance policy.
Term life insurance generally has much cheaper premiums than other forms of insurance. It’s good for younger insureds building a family, because it provides a maximum amount of protection at a time when their assets and savings are probably at their lowest point, but as they get older they may want to go with whole life.
Universal life insurance: Universal life insurance is a relatively new product, being developed in the 1980s as a means of providing increased flexibility to insureds. Premium amounts and the due date for payments can be adjusted and the cash value of the policy can be invested with taxes deferred. In fact, you can take further advantage of this by paying more than the premium amount. The excess payment will be invested, allowing you to build up an even larger tax-deferred investment.
The investment option that comes with universal life insurance is perhaps the most attractive part of this package, in that it allows you to build assets without incurring tax liability. If the investments are allowed to build until your death, your survivors could claim them all tax-free because life insurance proceeds are generally not subject to taxes.
To take full advantage of the investment opportunities provided by universal life insurance, you need to be financially savvy, or know someone who is. Consult with your insurance agent and accountant to make sure that you’re able to maximize your ability to profit from your insurance policy.
Life insurance is a great financial product that can provide a great deal of security for you in your family. In addition to the death benefit paid out to survivors in the event of the insured’s death, most policyholders can also take advantage of policy loans in times of economic need. Understanding your policy and what it offers is the key to taking full advantage of this very wise investment.