If you are of the small group of individuals who realize the importance of life insurance and have actually decided to purchase a life insurance policy, it is critical that you understand the options available to you, as well as how each type of insurance may fit your priorities, needs and wants. This blog will provide you with the insight you will need in selecting the best life policy for you and your loved ones.
What is life insurance?
A life insurance policy is a contract between the owner of the life policy and the insurance company. The insurance company basically will pay a death benefit to the beneficiaries in the event of the insured person's transition or death. Generally, the insurance proceeds are tax free to the beneficiaries and avoids probate.
What types of life insurance options exist?
There are many types of life policies available. The four main type of life insurance policies are:
- Term Insurance
- Guaranteed Universal Insurance
- Whole Life Insurance
- Variable Universal Insurance
Since no policy is good or bad, it really comes down to understanding what each type of policy offers and matching its offerings to your specific needs. When determining which may be best for you, you should ask yourself three main questions:
- How much insurance protection can I afford?
- What is the main purpose for obtaining insurance (determine how you want the proceeds to be used)?
- What is the longest period of coverage I require?
Term Insurance
This type of protection is the simplest and typically the cheapest of the four main options. It offers coverage for a specific time frame and will only pay out the face amount of the policy if the insured dies during the covered period. Generally, if you should outlive the period of coverage, you are not refunded the premiums paid over time. Although there are companies that offer "return of premium" policies which allow for a return of monies paid for the life policy should the insured person outlive the covered period, these types of policies are typcially much more expensive than basic term policies.
Guaranteed Universal Insurance
Guaranteed universal policies provides permanent protection, usually ending at age 100, 110 or 120. It offers a guaranteed death benefit as long as the premiums are paid, as well as a general cash account. Typically, this type of protection offers a very small amount of interest on the amount of your premium that goes into your cash account, so it works best for an individual who is most importantly seeking a permanent policy without a need for cash accumulation within the policy.
Whole Life Insurance
This type of contract is a permanent policy that builds cash value based on a particular schedule communicated by the insurance company. The policy owner is allowed to take loans against the cash value, however, the death benefit is reduced by the amount of outstanding loans. Dividends are usually issued on this type of policy, which helps build the cash value within the contract. Whole life policies are typically for individuals seeking a permanent policy and an accumulation of tax-deferred savings.
Variable Universal Insurance
This policy type is similar to that of the guaranteed universal policy in that it offers permanent coverage and builds cash value. However, the subaccount does not earn interest. Instead the cash value accumulated in the cash account is based on the performance of the investment vehicles you have selected for your subaccount. Since the policy's cash value increases and decreases based on the performance of your investments, your premium payment could increase or decrease as well. For instance, if the cash value fell below the cost of your insurance policy, you will have to pay to keep the contract in force.
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