Life insurance is an important component in a diversified financial portfolio. While it may be a difficult conversation to have with your loved ones, it’s an important and necessary one. We may not like discussing our own death but ensuring our families are taken care of and supported is paramount, especially for families with children. The first step is to understand which type of life insurance policy fits best with your situation. In this post, we explore the various types of life insurance policies including term and permanent options including whole, universal, and variable options.
The Primary Roles in Your Policy
Before diving into the various types of life insurance policies, let’s review the various roles associated with a life insurance policy. There are four primary roles: the insurer, owner, the insured, and the beneficiary. The company that provides the life insurance policy is the insurer. Typically, a plan participant is both the owner of a policy and the insured; however, this is not always the case. For example, a parent might be the owner of a policy, and therefore be responsible for premium payments, while the policy insures a child. The beneficiary is the person or entity who will receive the benefits upon the insured’s death. It’s important to ensure your family has enough life insurance to cover and support them in the event of a death in the family. For example, if you were to die tomorrow, would your current policy provide enough money for your spouse to cover the mortgage and/or pay for childcare in the event he/she will return to work? These considerations play into determining which type of life insurance is appropriate for you.
Understanding the Differences in Life Insurance Policy
What’s the difference?Term Life InsuranceWhole Life InsuranceUniversal Life InsuranceVariable Life Insurance
Coverage
Coverage is purchased for a set time period; typically 5,10, 15 or 30 years known as “term.”Permanent coverage for life. Also referred to as “cash value life insurance.”Permanent coverage for life. Also referred to as “adjustable life insurance.”Permanent coverage for participant’s life.
Benefits
Benefits are distributed upon death within the term coverage only. Term coverage is an insurance-only tool.Permanent coverage has an insurance and an investment/savings component.Permanent coverage has an insurance and an investment/savings component.
Offers more flexibility than whole life insurance.
Permanent coverage has an insurance and an investment/savings component. Variable life insurance allows participants to invest cash value on stocks and bonds.
Suitability
Term life insurance caters to short term goals. It is the easiest and most affordable life insurance to purchase.Whole life insurance caters to long-term goals. Premiums are consistent throughout the policy and guarantee cash value accumulation.Universal life insurance offers the benefits of low-cost term life insurance combined with the savings element of whole life insurance. For participants unable to make whole life insurance premiums this is a good alternative.Variable life insurance is suitable for participants looking for higher growth potential by investing cash value in markets. Therefore, policy participants bear more risk than in other policies.
Pricing
Pricing is determined based on several factors including health, gender, and age. Generally, women qualify for less expensive coverage plans than men. Participant plans increase in price with age.Premiums are significantly higher than term insurance. It’s advised to purchase whole life insurance at a young age to get lower premium costs.Universal life offers sliding premiums; lower prices during early-to-mid life and higher premiums during later life stages. Accumulated cash value may be used to cover premium payments.Premiums are significantly higher than term insurance. There are fees and charges associated with variable life insurance not associated with other policies.
Conversion Capabilities
Term insurance can be converted into a whole life insurance plan.Conversion may be possible based on plan specifications. Typically, conversions take place from term to a permanent policy not the other way around.Conversion may be possible based on plan specifications. Typically, conversions take place from term to a permanent policy not the other way around.Conversion may be possible based on plan specifications. Typically, conversions take place from term to a permanent policy not the other way around.
Investment Vehicles
Not applicable for term insurance plans.A portion of each premium payment is placed in a high interest bank account to accumulate value in a tax-deferred basis. Option to receive surplus savings as yearly dividends.Insurance company establishes set interest rate minimum. Excess earnings are applied to the cash value of a policy. The potential to earn more than the minimum crediting interest rate differentiates universal life insurance from whole life.Excess cash value accounts may be invested in mutual funds comprised of stocks and bonds with the goal of earning higher rates of returns. Full risks are comparable to typical market fluctuations.
Borrowing Capabilities
Not applicable for term insurance plans.Participants may borrow against the cash value, accumulated savings, of their permanent life insurance policy. Typically, interest rates are significantly lower and more favorable than current market rates.Participants may borrow against the cash value, accumulated savings, of their permanent life insurance policy. Typically, interest rates are significantly lower and more favorable than current market rates.Participants may borrow against the cash value, accumulated savings, of their permanent life insurance policy. Typically, interest rates are significantly lower and more favorable than current market rates.
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