Term Life. Term life insurance is temporary insurance because the policy is only for a specified period of years. It accumulates no cash value. Term life insurance is often called pure life insurance because it consists solely of life insurance with no cash accumulation or other features. It is the cheapest way to purchase life insurance to obtain the highest face amount or dollar value policy. Upon expiration of the initial term of the policy, you may be able to renew it for an additional term but the premium may increase since this type of policy does not provide a level premium.
Whole Life. Whole life insurance provides a level premium that generally remains the same throughout the insuredís lifetime. The policy continues to age 100. It has a savings feature that accumulates a cash value which can be accessed through policy loans. Whole life insurance is permanent insurance because it continues throughout the insuredís lifetime provided the premiums are paid. As you make payments, the cash value in the account grows tax-deferred until you withdraw it. However, amounts taken out as a loan will reduce the death benefit under the policy and if a large enough amount is withdrawn, it can constitute a complete surrender resulting in termination of the coverage. The dividends you earn may be used to reduce your premiums.
Universal Life. Universal life insurance is also permanent life insurance because it continues throughout the insuredís lifetime provided the premiums are paid. Like whole life insurance, universal life has a cash accumulation component. However, it differs from whole life insurance because it has features that allow for either the death benefit or the premiums to be adjusted depending on the needs of the insured. For example, the amount of the premium can be adjusted downward for a reduced death benefit or the death benefit can be increased for a higher premium.Variable Life. Variable life insurance is also permanent life insurance because it continues throughout the insuredís lifetime provided the premiums are paid. The premiums remain level throughout the life of the policy holder. Variable life is like whole life and universal life in that it has a cash accumulation component. However, you generally cannot withdraw cash from the variable life policy during your lifetime.Variable life insurance offers a wide range of investment options unlike whole life or universal life. A variable life policy features a separate account in which the policyholder can have a portion of the premiums invested in stock, bond, or money market mutual funds to seek a higher rate of return than is available with other types of permanent insurance. The separate account grows tax deferred until the policy is surrendered. The death benefit and value of the variable life policy will vary or fluctuate depending on the performance of the investments, but a minimum death benefit is guaranteed. If you earn interest on the separate account, that amount can be used to pay premiums on the policy.Variable life insurance is usually the most expensive type of insurance. It is regulated under the federal securities laws and is required to be sold with a prospectus.Variable Universal Life. Variable universal life combines the features of universal life and variable life. It features a separate account where part of the premiums can be invested in stock, bond, and money market mutual funds. Variable universal life also provides the flexibility to have the death benefit and/or the premiums adjusted upward or downward. See life insurance trusts for more information.
How to Decide Which Type of Life Insurance to Buy
Term life insurance is often recommended for young families that are just starting out or for people living on fixed incomes that could not otherwise afford a life insurance policy. Permanent insurance, like whole, universal or variable life, is best suited for those who can afford to make an investment in their insurance policy and believe they will be able to pay the premium throughout their lifetime, including into their retirement years. While some view permanent insurance as an investment, it is important to be aware the cash component of these types of permanent policies earns a very low rate of return compared with other investment options.You may be asking yourself, which type of life insurance is right for me? If you think you will only need life insurance for a limited period of time, such as until your children are grown or until certain debts or liabilities are paid, term life insurance may be the best option for you. However, if you want to leave a legacy to your children, spouse or other family members, you may want to choose a permanent type of life insurance that will be in effect throughout your lifetime. Also, if you want to provide liquidity to your estate, so other assets of the estate will not have to be sold immediately after your death to pay estate taxes, probate fees, and other expenses, whole life or universal life may be the best choice.If you have a low risk tolerance, want fixed premiums, and a fixed death benefit in a life insurance policy that will continue throughout your life, whole life is the policy to consider. If you want to invest in permanent insurance, but would like some flexibility in the premiums or death benefit amount, you may want to speak to an insurance agent about universal life coverage.Variable life insurance is for someone with a higher risk tolerance that wants the opportunity to earn a greater return than is available with other types of insurance. Because the death benefit varies according to the performance of the investments in the separate account, variable life insurance should be used with caution by anyone that needs a set, predetermined amount of coverage to provide for family members, payment of debts or estate liquidity.Finally, if you want the features of variable life combined with the flexibility to have premiums and death benefits adjusted during your lifetime, a variable universal life policy should be considered. After you complete your research, consult an experienced life insurance agent or financial planner for more information.
What You Need to Know About Life Insurance Before You Buy
If you want answers to your questions about life insurance, refer to Questions and Answers on Life Insurance by Tony Steuer. Written by an author with nearly two decades in the insurance industry, this book covers the complete range of issues that arise when buying life insurance. It also provides guidance on what to do with your existing policy, including monitoring the policy, replacing it, taking loans on life insurance, etc.The book Questions and Answers on Life Insurance covers estate tax issues that can arise with respect to ownership of life insurance and the use of life insurance trusts. It features helpful resources, including contact information for state insurance departments and guaranty associations. See estate planning books for more selections.
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