Insurance policies can be confusing and hard to read. In this article we’ll discuss how they work, the pros and cons of different types of life insurance, and how to decide which type is right for you. A policy is a contract between you and an insurance company that spells out the coverage and exceptions. It can cover many different things like your car, house, or health.
Term Life Insurance – Term life insurance is a good option for people who need a certain amount of coverage for a limited time. You should think of it like car insurance – you pay premiums in exchange for the peace of mind knowing that your family will be covered in case of an accident.
Whether you choose a level term policy or a year-to-year renewable term, it is important to assess your needs and budget. If you’re looking for a more long-term solution, consider working with a financial planner or independent life insurance agent to determine the right policy for you.
It’s also important to identify your beneficiaries. These are the people who will receive your death benefit. They can be your spouse, children, or heirs. Alternatively, you can leave the money to a charitable organization. Many life insurance policies include riders to help you tailor your coverage to suit your needs. These options may come at an additional cost, depending on the type of rider you choose.
Whole Life Insurance
Whole life insurance offers lifetime coverage as long as the premiums are paid. Unlike term policies that expire, this type of permanent policy guarantees a death benefit and also includes a cash value component that builds over time.2
These earnings are credited on a tax-deferred basis and may be borrowed or used to pay premiums when needed. Depending on the specific policy, cash values may grow faster than traditional ordinary life policies.
There are several types of whole life insurance including level premium whole life insurance, indeterminate premium whole life insurance and universal life insurance. Level premium whole life policies have premium payments that remain consistent, while indeterminate and universal premiums can fluctuate based on the insurer’s mortality experience, investment earnings and expenses. There is also limited payment whole life insurance, which allows insureds to purchase guaranteed lifetime protection for a specified period of time with premium payments that are lower than other whole life plans.
Universal Life Insurance
Universal life insurance (UL) is a form of permanent life insurance that accumulates cash value like a savings account. It also offers flexible premium payment options and can be diversified to provide a potentially higher growth potential than whole life policies.
The amount of premium payments exceeding the current cost of insurance is credited to the policy’s cash value, which earns interest each month. The amount of premiums that are necessary to keep the policy in force is subtracted from this balance each month.
If the policyholder wants to borrow against or cash in the savings portion, they must pay a tax on the withdrawals. Unlike whole life policies, UL policies can have flexible premiums and the death benefit can be adjusted as needs change. This flexibility can make a UL policy more affordable than whole life insurance. However, missing premium payments can result in a lapse in coverage. If a lapse occurs, the policy may be terminated and the beneficiary will receive no death benefits.
Variable Life Insurance
Like whole life and universal insurance, variable universal life (VUL) combines the benefits of permanent coverage with a cash account earning tax-deferred interest. However, VUL offers more control than these two other types of permanent policies with the flexibility to allocate your cash-value component into a variety of investment funds.
VUL is best for people who want the flexibility to take more of an active role in their life insurance investment strategy and don’t mind taking on some market risk. It’s also good for those who want the flexibility to vary their premium payment or death benefit over time.
You may also hear this type of policy referred to as burial or final expense insurance, but regardless of the name, it’s usually a small whole life policy that provides coverage for funeral costs and other end-of-life expenses. It’s usually a more affordable way to get a permanent policy than whole or universal insurance.
