Life Insurance is a unique financial
product. It was designed to provide a death benefit for
your beneficiaries if you die, but permanent life
insurance can be used for a multitude of other financial
needs as well.
Types
of Life Insurance
Term
Term Insurance covers you for a term of one or more
years. It pays a death benefit to your beneficiary only
if you die in that term. Term insurance generally offers
the largest insurance protection for your premium
dollar. It generally does not build up cash value. You
can renew most term insurance policies for one or more
terms even if your health has changed. Each time you
renew the policy for a new term, premiums will be
higher. Ask what the premiums will be if you continue to
renew the policy. Also ask if you will lose the right to
renew the policy at some age. For a higher premium, some
companies will give you the right to keep the policy in
force for a guaranteed period at the same price each
year. At the end of that time you may need to pass a
physical examination to continue coverage, and premiums
may increase. You may be able to trade many term
insurance policies for a cash value policy during a
conversion period — even if you are not in good health.
Premiums for the new policy will be higher than you have
been paying for term insurance.
Universal Life
Universal Life Insurance is a kind of flexible policy
that lets you vary your premium payments. You can also
adjust the face amount of your coverage. Increases may
require proof you qualify for the new death benefit. The
premiums you pay (less expense charges) go into a policy
account that earns tax sheltered interest. Charges are
deducted from the account. If your yearly premium
payment plus the interest your account earns is less
than the charges, your account value will become lower.
If it keeps dropping, eventually your coverage will end.
To prevent that you may need to start making premium
payments, or increase your premium payments, or lower
your death benefits. Even if there is enough in your
account to pay the premiums, continuing to pay premiums
yourself means that you build up more tax sheltered cash
value.
Whole Life
Whole Life Insurance covers you for as long as you live
if your premiums are paid. You generally pay the same
amount in premiums for as long as you live. When you
first take out the policy, premiums can be several times
higher than you would pay initially for the same amount
of term insurance. But they are smaller than the
premiums you would eventually pay if you were to keep
renewing a term policy until your later years. Some
whole life policies let you pay premiums for a shorter
period such as 20 years, or until age 65. Premiums for
these policies are higher since the premium payments are
made during a shorter period.
Cash Value
Cash Value Life Insurance
is a type of insurance where premiums charged are higher
at the beginning than they would be for the same amount
of term insurance. The part of the premium that is not
used for the cost of insurance is invested by the
company and builds up a cash value that may be used in a
variety of ways. You may borrow against a policy’s cash
value by taking a policy loan. If you don’t pay back the
loan and the interest on it, the amount you owe will be
subtracted from the benefits when you die, or from the
cash value if you stop paying premiums and take out the
remaining cash value. You can also use your cash value
to keep the insurance protection for a limited time or
to buy a reduced amount without having to pay more
premiums. You also can use the cash value to increase
your income in retirement or to help pay for needs such
as a child’s tuition without canceling the policy.
However, to build up this cash value, your must pay
higher premiums in the earlier years of the policy. Cash
value life insurance may be one of several types; whole
life, universal life, and variable life are all types of
cash value insurance.
