Types of Life Insurance
Purchasing life insurance today may seem like a trip to Wal-Mart- there is an almost overwhelming amount of products and options available to the consumer. This may seem like a hurdle, but in reality the wide array of choices allows for a well-informed client to purchase an insurance solution that is tailor made for them. We specialize in creating custom made life insurance packages for people in all walks of life and in every financial situation.
Our wide network of providers ensures that you will have an insurance policy that fits your situation perfectly at a great price.
Term vs. Permanent
The two biggest differences between term and permanent life insurance is that permanent insurance offers:
- Lifetime protection (until age 100 or 120 in some cases). Permanent life policies will not expire as term policies do. The death benefit will be available for your lifetime, or until you reach age 100. If when you reach age 100, the total value of the policy will be refunded to you.
- Cash Value. Permanent life policies allow you to build up a cash value or savings component in addition to the death benefit. The cash value portion can be accessed similar to a savings account and is available whenever you need extra cash. Additionally, the insurance company will pay interest on the cash value allowing the value to build over time. That growth also occurs on a tax-deferred basis so that you will not be taxed on the growth of the account, only when you access the gains on the account. To avoid being taxed on the gains, policy owners have the option to take a tax-free loan against the value of the policy. These loans can be used for any reason and can be structured to provide additional funds in retirement without having to pay income-tax.
The most basic type of life insurance policy is Term Insurance. Term insurance is simple to understand because it provides a fixed death benefit for a limited amount of time. The limited time span and lack of extra features also makes it the most affordable type of policy.
- Fixed premiums for a set amount of time – generally 5, 10, 20, or 30 years.
- The most affordable type of life insurance.
- Fits both short and long term needs life insurance protection.
- Pays a lump sum and tax-free death benefit.
- Affordability: Due to the limited time span and the fact that the premiums do not pay dividends or build cash value, it is the most affordable type of policy.
- Variety of Term Lengths: Term life can provide protection over a variety of time spans. For a family that may only need life insurance protection for a short time, such as during college years, a short term life insurance policy provides affordable protection only for the time that you need it.
- Return of Premium: Some term policies offer a Return of Premium option. Return of Premium will refund the total cost of all the premiums paid into the policy if the insured is still living at the end of the term. So for example, if you have a 30-year term that costs $600 per year, you will receive $18,000 if you are still living after the 30 years pass.
- Term Insurance does not have the cash value component that permanent life insurance has.
- Term insurance does not receive dividends that may be paid out by the insurance provider.
- If a term-insurance policy is cancelled or if you outlive the term you will not receive any of your premiums back, unless you have a return of premium option.
The phrase “Permanent Insurance” is an umbrella term for several types of life insurance policies. The common factors in each of these polices is that they provide lifetime protection and build cash value on a tax-deferred basis.
- Lifetime Protection: For those who require the protection of life insurance throughout their entire lives, Permanent Life insurance is a great match. All types of permanent life insurance provide protection throughout the entire life of the policyholder.
- Guaranteed rate of return and death benefit: Unlike investing directly in the stock market or a 401k, permanent life policies have a guaranteed minimum rate of return, similar to a savings account. This can give you the security and peace of mind knowing that your cash value will never lose value and will grow for you to use later in life.
- More expensive than term. Since permanent life polices protect you for your entire life and provide grown in cash value, the cost will be more than a term policy. This cost can be offset later in life as the growth in your cash value can be used to pay part of or the entire premium of the policy.
Whole life insurance is for those who need lifetime protection and enjoy guarantees and predictability for their policies. Due to the fixed rate of return and level premiums, you can easily forecast out the value over time of the policy. You can then plan on how you want to use the cash value portion later in life – whether taken out as a tax-free loan or used to pay the premiums on the policy.
- Fixed Premiums: Whole Life has level premiums throughout the life of the policy and your premiums are guaranteed never to increase.
- Guaranteed minimum death benefit: Like term, whole life has a guaranteed minimum death benefit amount but unlike term it provides that protection for your entire life.
- Guaranteed interest rate on cash value: Whole life policies have a guaranteed rate of return on the cash value amount. This amount will never decrease or increase and allows you to have a predictable growth in your cash value.
- Opportunity to earn dividends: Occasionally participating providers will share part of their financial growth with their policyholders. You can use these gains to build up your cash value, purchase an additional policy to increase the death benefit, pay part of the premium, or be cashed out to you directly.
Universal life is similar to whole life in most respects, but differs primarily due to the fact that it has flexible premiums.
- Flexible Premiums: Universal life allows for policyholders to increase or decrease the amount of premium they pay. Depending on the policyholder’s current situation they can pay more into their policy to increase the cash value or decide to reduce the premium they pay for a certain period. This allows policy holders to reduce the cost of premiums to cover major expenses and then increase the premium (and the cash value) after those expenses have been paid.
- Various interest crediting options: Universal life can offer a guaranteed minimum interest rate similar to whole life or in some cases (Indexed Universal Life) can be tied to the performance of a stock market index. While not directly invested, the cash value of the policy is guaranteed never to lose value and will return a portion of the index’s gain. This option provides the opportunity for additional gains in the cash value beyond what can be offered by a fixed interest rate.
Unlike universal or whole life, variable life allows for the policy holder to invest their cash value in a separate account composed of a variety of instruments such as stocks, bonds, equity funds, money market funds, and bond funds. This can offer a greater rate of return on the cash value versus whole or universal Life. While products such as indexed universal life offer the guarantee of never losing value, variable life offers no such guarantees and is required to be sold as a securities product much in the same way that mutual funds are sold. The risk of the investments is the responsibility of the policyholder and not the insurance company.
Depending on the performance of the cash value account, the policy holder may be required to increase premiums to maintain the death benefit, although paying more than the minimal required premium generally avoids this situation.
Final expense insurance is designed mainly to cover funeral and burial costs. These low-cost policies average around $10,000 in benefits, do not require a medical exam, and cover most pre-existing conditions.