Life Insurance Plans
Are you new to buying life insurance? You need to know how it works, and what you have to understand in order to choose the right coverage.
What Is Life Insurance?
A life insurance policy is quite simply a contract that you're making with a company that will give money to your beneficiaries when you die, in exchange for you making payments while you're alive. There are two types of life insurance. Term life insurance provides protection for a specific length of time. Whole life or universal life insurance, provide coverage for your entire life.
Types of Life Insurance Policies
Life insurance comes in all sizes, shapes, and colors and not all policies are created equally. The structure, the cost, the duration, and the amount of benefits can vary considerably with different types of policies e.g. whole life insurance, term life insurance, variable life etc. This is going to be a very brief introduction to different types of life insurance policies, but it should be sufficient to get you started.
Term life insurance
This is one of the most common policies. It's designed to help protect the beneficiary against financial loss that results from the death of the policy holder. A term life insurance policy doesn't increase in value, and the maximum term is usually 30 years.
Term life insurance protects you typically for a period of anywhere between ten and twenty years. The premiums don't change. Once the term runs out, you may be able to buy additional coverage, but the rate will be higher. Overall, though, term life insurance is generally cheaper than permanent life insurance.
Most people use term life insurance to replace lost income potential during the years that they're working. It's a safety net for beneficiaries, and it ensures that if you die, your mortgage will be paid off, your business will keep going, and your kids will still be able to go to college.
Term life insurance delivers a lump sum payout when you die.
Whole Life Insurance
This is a type of permanent insurance that covers you for your entire life. Because it's not based on a fixed term, the rates are usually higher. Premiums are usually fixed. Whole life insurance differs from fixed term in that it has a cash value - if you find yourself in difficult financial straits, you can actually take money out of your whole life policy. It reduces your death benefit, but you have access to ready cash when you need it.
Whole life insurance policies protect the holder and his or her beneficiaries for the duration of the life of the policy holder. This is also sometimes called “permanent coverage.” This type coverage also carries a cash value surrender component that grows until the contract is surrendered. Whole life insurance premiums don't change, and the death benefit is guaranteed for as long as the insured person lives.
With this type of policy, a portion of your premium goes toward the insurance component of your policy, part goes toward administrative expensive, and the rest goes to the investment part of the policy. Any interest that you accumulate out of whole life insurance isn't taxable until you withdraw it.
Universal Life Insurance
Universal life insurance is a type of permanent life insurance. Universal life policy is flexible as opposed to whole life insurance. You also get the opportunity to lower or raise your premiums over the duration of the universal life insurance policy. It carries tax-deferred benefits (as does the whole life). Because you're covered for your entire life, universal life insurance will have higher premiums than term life insurance.
Frequently, universal life insurance is used as an estate planning strategy, designed to help transfer maximum wealth to your beneficiaries. It's also used as income replacement.
Universal life insurance is sometimes called flexible premium, or adjustable life insurance. It's also permanent, and it provides cash value benefits that are based on current interest rates. What makes the universal life insurance policy different from a whole life is that the cash values, the premiums, and the level of protection in universal life insurance can be adjusted depending on the needs of the insured party.
Variable life insurance combines the benefits of whole life insurance with the potential for growth that is attached to investment funds. It's made up of two components - the general and the separate account. The general account is the reserve of the provider, and it isn't allocated to the basic, individual policy. The separate account is made up of investment funds, like bond funds, money market funds, or equity funds that are administered by the insurance company. Because of this, the death benefit could fluctuate.
Variable Universal Life
This combines the features of the variable life and the universal life policy, and gives the policy holder a certain amount of flexibility when it comes to selecting death benefits or adjusting premiums. The value of the death benefit could fall or rise depending on how well the underlying investments of the policy are doing, but most policies will guarantee a certain figure.
Comparing Different Types of Life Insurance
The type of insurance you choose will depend on the type of benefit you want, how long you want to pay for the insurance, and how much you want your beneficiaries to receive when you die. Your insurance agent can help you to determine the type of life insurance plan that's right for you and your family.
Things to Think About
When you're considering life insurance policies for you or for your family, you should carefully evaluate the benefits of temporary coverage versus permanent coverage. Policies can be structured very differently, and death benefits will not always be the same from insurer to insurer. You have to consider pricing, duration, and coverage.