Life insurance comes in many different shapes and sizes, each one created to suit specific needs. While the death benefit amounts may be the same, other things, such as costs, structure or duration, will be very different. This article takes a look at the types of life insurance currently out there, to try and help you understand which one is best for you.
There are two major types of life insurance: term and whole life. The latter is sometimes also called permanent life insurance. In encompasses several subcategories, such as traditional whole life, universal life, variable life and variable universal life.
1. Whole Life
With whole life insurance, you get protection for the entire duration of your life. The payments go in two different direction. One part goes toward paying administrative expenses, another to the insurance portion of the policy and your premium’s balance goes toward the investment, or cash portion of your policy.
All the interest that you accumulate through the policy’s investment portion is tax free until you withdraw it. And if you do make a withdrawal, it will be tax free up to your basis in the policy. Anything above that will be taxed as ordinary income.
Whole life insurance policies tend to have a much higher initial premium than other types of life insurance. However, if you build up enough cash in the policy, it can be used to pay the premiums. This is known as a participating whole life policy. It combines the benefits of permanent life insurance protection with a savings component, offering the policy owner additional payment flexibility.
2. Universal Life
Universal life insurance is another type of whole life insurance. It is a permanent policy which provides the insured with cash value benefits based on current interest rates. What sets it apart from whole life insurance is that the premiums, cash values and level amount of protection can each be adjusted up or down during the contract term, according to the insured’s needs.
Cash values earn a certain interest rate, set periodically by the insurer. It is guaranteed not to drop below a certain level.
3. Variable Life
Variable life insurance comes with both the traditional protection and savings features of whole life insurance, as well as with the growth potential of investment funds. It has two distinct components. The first is the general account. It is the liability account of the insurance provider, not allocated to the individual policy. The second component is the separate account. It is comprised of various investment funds within the insurance company’s portfolio. The value of the cash and death benefit may fluctuate because of this feature. It is also where the name of the policy comes from.
4. Variable Universal Life
This type of whole life insurance combines the features of universal life with variable life, offering the insured the possibility to adjust premiums, death benefits and the selection of investment choices. Variable universal life insurance policies are classified as securities. They are subject to Securities and Exchange Commission regulation and oversight. The death benefit value may rise or fall, depending on the success of the investments, but a minimum death benefit will be paid no matter what.
5. Term Life
Term life insurance is one of the most common and most popular types of insurance. Although it can help protect your dependents against the financial loss caused by your death, it only provides protection for a limited amount of time. These policies do not build cash values. The maximum term period is 30 years.
Premiums for term life insurance are significantly lower than those for whole life. But the cost of premiums increases as the insured gets older.
Term life insurance is useful when you only need protection for a limited time, such as until your children grow up and finish college. It can feature some variations, such as:
- Annual Renewable and Convertible Term – Such a policy covers you for only one year. However, you can renew the policy for successive periods thereafter. Unfortunately, the premiums are higher. And you can also turn such policies into whole life policies without any additional underwriting.
- Level Term – It comes with an initial guaranteed premium level for specific periods. The longer the guarantee, the greater the cost. Level term can be renewed after the guaranteed period, but the premiums do increase as the policyholder gets older.
- Decreasing Term – This policy is often used together with mortgage debt protection. It has a level premium, but the death benefit decreases over time.
Getting the right insurance for you requires a lot of hard work. However, afterwards you can rest assured that your family is protected.