For wage earners who want to buy life insurance so they can provide a financial safety net to family members in the event of their early death –that is a wise decision. However, purchasing life insurance is not as straight forward as auto or home insurance. Not only must consumers choose what level of coverage, but also what type of insurance is best for their needs. Listed below is a guide to two main types of life insurance available to help consumers make that decision.
Regardless of the type of insurance a consumer purchases, all leave a death benefit to family members based on the amount of coverage selected. Some choose to buy life insurance to provide their family enough money to continue their same lifestyle, others leave money specifically for funeral expenses and/or to pay off remaining debt or others choose to include money for their children’s college education. For those without children, some leave money to supplement retirement savings for their remaining spouse or perhaps leave money their favorite charity. The coverage levels and the reasons people buy life insurance is as varied as the people who buy it—the variations are endless.
This type of insurance is called permanent because it is intended to last the entire lifetime of the insured. Permanent insurance also builds money toward a cash value for the insured. There are two options of permanent life insurance: whole and universal/variable universal.
Whole life insurance is intended to provide a death benefit at the end of the insured’s life no matter how long the person lives. In the early years of the policy, the premiums are higher than term life but the monies go toward a special account that is invested (at a typical rate of 2-4 percent) and builds up a cash value. Over time, the premiums will usually be lower than they would be for a term life policy. Moreover, the value of the policy can be borrowed against or later used to pay for the fixed premium payments. The insured can also get a cash payout of its current value should they want to cancel the policy. However, the downside is there are penalties involved in borrowing against the policy’s cash value or to cancel it altogether. When the insured passes on, their beneficiaries will receive only the death benefit and not the cash value of the policy. This plan works best for someone who can afford the higher premiums and wants a guaranteed death benefit for their family members or estate no matter how long they live.
Universal life is another type of permanent life insurance. It is similar to whole life in that it has a cash value component to it and earns a fixed amount of interest each year. However, the difference is that it gives the insured some flexibility in making changes to the premium amount and the beneficiaries’ death benefit. This is because with universal life insurance, the death benefit, expense element and the cash value element are broken out so there is more flexibility for the insured. For example, the insured can set up their policy to have a different death benefit amount for different stages of life such as selecting a higher cash payout when children are younger and a lower amount when they are of adult age. Another example, maybe one year the insured gets a big bonus and wants to defer the money so he pays double premiums that year so the following year when his annual income is lower, he decides to use the money in that account to pay the premiums that year. However, the insured needs to make sure they are paying enough into their cash-value account so it will have value at the end. Some can also set it up so that their beneficiaries will receive the death payout as well as the cash value of the policy.
Variable universal life is much like universal life but instead of the cash value amount being invested in a safe low-interest-bearing account, it is invested in higher risk opportunities like mutual funds or stock funds. The insured has potential to make more money in their cash value account because of the potential higher dividends but conversely, if the stocks do poorly, the person could lose more in their account. This policy is good for the consumer who wants lifetime coverage and is willing to take a chance with higher risk investments for the potential higher dividends to their cash-value account.
TERM LIFE INSURANCE
Term life insurance is a simple and straightforward policy that is intended for a specific period of time and has no cash-value component. It has lower monthly premiums than its permanent life insurance counterparts but is not intended to last a lifetime as those policies do. Some choose to renew their policies on an annual basis but most choose guaranteed level term life insurance, which is where you a select coverage for a certain time period in increments of five years up to 30 years. For parents, they may choose to have coverage until their children become adults or for those who are married without children, they may choose to have coverage until the remaining spouse is eligible for retirement benefits. This plan works well for those who want a basic and affordable plan to provide coverage for a certain time period. The biggest downside is if they want to renew and extend the plan for another time period, they will have to reapply, take a medical exam and pay a higher rate since they will be older than when they bought their previous policy.
Consumers should get at least a few life insurance quotes from different reputable life insurance companies and ask any questions they may have regarding the different types of life insurance policies available today.