Insurance is an important financial necessity. Prime among insurance products is life insurance. There are many types of life insurance products out there, and understanding what they are and what their use is can be confusing.
Life insurance has many uses and purposes. A visit to an insurance broker could present you with a long list of products; term, universal, variable What does it all mean? And more importantly, which is right for you?
Term life is easily the most popular form of insurance. This is the type of insurance most commonly sold. It is the cheapest form of insurance, offering the largest benefit for the lowest cost.
This insurance is sold for a determined period of time, the “term.” The cost may be paid periodically, such as monthly, or in a lump sum. An up-front lump sum payment is referred to as a paid-up policy.
The older you are when you purchase the insurance the less expensive it will generally be. You will also usually have to go through underwriting for term life insurance, meaning that you will have to answer health questions and may even be subject to a physical.
The risk here is that when your term expires you may have to re-qualify for a new contract. If your health has deteriorated you may be uninsurable, just when you most need it. Also, the price for the policy may be significantly higher when it comes time to renew.
Many financial planners will suggest the purchase of term insurance due to its lower cost and advise that you invest the difference.
A whole life policy will build cash value in addition to providing a death benefit. The premiums for a whole life policy will be higher than for a term policy for this added benefit. The policy will generally also receive a dividend from the insurance company. This dividend can be added to the cash value of the policy or be used to purchase additional insurance.
These policies have flexible premium options. You can usually pay up the entire policy up front, make equal monthly payments, or have payments that increase every year.
Variable Universal Life
This type of policy is quickly gaining in popularity. It is both an insurance policy and an investment vehicle. Like Whole Life it builds cash value, the value is invested in any of several investment options. The premium that you pay is divided into paying for the insurance and investing in the fund of your choice.
This policy gives you a great deal of flexibility and control. You can borrow from the cash portion, withdraw money, and even vary the amount of your premium every month. This policy will require you to keep an eye on it, and you won’t be able to get away with only making the minimum payments every month. You need to keep track of both the insurance part of this policy and the investment.
If your premium payment cannot cover the cost of insurance the policy will pull it out of the cash portion. This is a quick way of depleting your investments, and coupled with a declining market, could cost you significantly.
Another difference between this policy and a Whole Life policy is that a Whole Life policy is guaranteed. This policy is not.
Either way, all growth in insurance policies is tax deferred.
There are a lot of insurance options out there these days. Navigating to the appropriate policy for you requires a little bit of careful consideration. The assistance of a professional can often prove invaluable, but be prepared with a general idea of what you need before meeting with an agent.