When you decide that you need life insurance, you will discover that all life insurance policies fall into two primary categories of insurance. They are Term Life and Whole Life which is also referred to as Permanent Life. Both offer several different types for you to choose from.
Term Life Insurance
Let us first consider Term Life Insurance:
- Term Life Insurance is in effect only for the “term” specified in the policy. Think of it as basic insurance the same as auto insurance- you buy it for a period of time after which it expires.
- The death benefit is payable only if the insured dies during the term of the policy.
- The specified amount of coverage has premiums which are fixed over the term of the policy, usually in 10-year increments.
- Many policies offer you the option to buy Increasing or Decreasing Term which gives you the option to increase or decrease the amount of coverage throughout the term period.
- Renewable Term is a provision that includes a renewal option that gives the policy owner the right to renew the insurance coverage at the end of the specified term even if they have become uninsurable.
- Some Term policies will give the policyholder the right to convert the term policy to a permanent policy which is an important feature if you become uninsurable.
- An employer or professional association can buy Group Term that is intended to cover a group of people with a reduced premium.
Whole Life Insurance
The basics of Whole Life or Permanent insurance are:
- A Whole Life policy provides coverage throughout a person’s “whole life”. This is an important feature due to the fact that a person could develop health problems rendering them uninsurable, but as long as the premiums are paid, this policy can’t be canceled.
- This type of policy has an investment component that builds cash value; and depending on the policy, it can be withdrawn or borrowed against.
- Universal Life is characterized by its flexible premiums and flexible face amounts that allow you to decide how much you want to invest.
- Indexed Universal Life, a form of Whole Life insurance combines the premium and death benefit flexibility. The cash value’s current crediting rate is tied to the performance of a financial index.
- Variable Life policies are another form of Whole Life in which the death benefit and the cash value of the policy fluctuate according to the investment performance of separate account investment options. This is not the same as accumulated cash value. A nice safe-guard with Variable Insurance policies is that they it guarantee that the death benefit will not fall below a specified minimum.
- Variable Life has another option known as Universal Life, a form of Whole Life insurance that combines the premium and death benefit flexibility of Universal Life insurance with the investment flexibility and risk of Variable Life. Sometimes this is referred to as Flexible Premium Variable Life insurance and Universal Life; a nice feature.
- You can buy a Whole Life policy known as the Last Survivor Universal insurance, also called “Survivorship” or “Second-To-Die” Life insurance which is designed to pay estate taxes. This policy covers two persons and provides for payment of the death benefit proceeds only when both of the insured have died.
- Single Premium Whole Life insurance is a policy which allows you to pay for your insurance up front. This is an excellent policy for a person over 65 wanting to protect a “nest egg” and pass it along as an inheritance, tax free. It still maintains an accumulated cash value that can be withdrawn or borrowed against in the event of a financial need.
Each whole life policy needs to be considered with your particular family and financial needs in mind.
We all have different needs, therefore we should make prudent comparisons between Term Life and Whole Life and all of the variations available with each type of policy before making a purchase. The last thing that a person wants is to realize at age 65 that they have made a big mistake. Your Life Insurance options at that age are much more limited.