Choosing the Right Life Insurance
Life insurance serves to protect your estate and your family in the event of your death. It can provide security, and freedom from financial worries. There are several basic types of life insurance including term life insurance, universal life insurance, variable life insurance and whole life insurance. All life insurance options have distinct advantages and disadvantages. When selecting a life insurance policy, a buyer should be conscientious to choose the option best suited to his or her personal needs. Adequate life insurance coverage is a critical need, and one that should not be ignored.
Term life insurance is a common and fairly easily accessible choice. A term life insurance policy pays a death benefit to the assigned beneficiary of the policy for the life, or term, of that policy. The policy owner pays a premium to the life insurance provider, and similar to home or auto insurance the coverage ends when the owner stops making payment or the term of the policy ends. Terms may vary from a renewable single year policy up to thirty years. Twenty-year term life insurance policies are quite popular today especially since they usually provide a high death benefit for a relatively low cost during the developmental years of a family. If you renew your policy, you can expect your premiums to increase as your age does; however, premiums typically hold steady during the term of the policy. If your health is good at the time of renewal you may be able to procure a policy at rates lower than standard renewal rates. Annual renewable term policies do exist, where renewal options are guaranteed, but premium costs may increase. While most term life policies provide a fixed death benefit, decreasing term life insurance policies do exist. These policies pay a progressively smaller death benefit amount over the term of the policy. Term life insurance is not considered an investment, and cannot be used as such; however, it is also the least expensive form of life insurance.
Whole life insurance differs from term life insurance in several ways. First and foremost, as the name indicates, this is a life insurance policy that is valid for the entire life of the policy holder. As long as premiums are paid, the policy cannot be cancelled, and death benefits will apply even for the elderly. A whole life insurance policy has a guaranteed death benefit, and guaranteed cash values. Unlike a term life insurance policy, the cash value is considered a living benefit and can be withdrawn as a loan against the policy at any time as long as there is sufficient value. The cash value of the policy is typically invested by the insurer, allowing a good potential return in the form of dividends to the policy owner. It is important to evaluate the financial stability and the historical investment return of an insurer when deciding on an insurance company. Most insurance companies are also assigned ratings by Moody’s or A.M. Best.
Universal life insurance, like a whole life policy, pays a death benefit for the life of the policy holder, assuming premiums are paid or the cash value of the policy is adequate to cover the costs of insurance. In a universal life policy, premium payments above the cost of the insurance policy itself are credited to the policy’s cash value. The cash value of the policy is interest bearing, and may yield a good return. Unlike whole life insurance policies, typically both premiums and death benefits can be changed over time, allowing some flexibility if life insurance needs change. A universal life insurance policy may lapse and not pay a death benefit if premiums or cash value do not cover the cost of insurance. Universal life insurance offers substantial tax advantages, both in the final death benefit and also in the form of tax free policy loans against the cash value. Universal life insurance premiums may be paid in several ways. A single lump sum payment may establish the policy, so long as the cost of insurance is covered by the amount at hand. Fixed premium payments are another option, and typically are paid for a shorter term than the overall duration of the universal life policy. In this case, further payments may be required if the cost of insurance depletes the premium and cash value amounts paid in, and the policy holder can choose to allow the policy to lapse, pay in further, or lower the death benefit amount. Finally, a flexible premium is an option. In this instance, the policyholder chooses how much to pay in to the universal life policy. Two death benefit options are typically available with the flexible premium plan. The first is a level death benefit, unchanging for the duration of the policy. The second option is an increasing death benefit.
The final life insurance option offers the most control over the policy. A variable universal life insurance policy allows the cash value to be subdivided among accounts, and then invested in mutual funds, stocks, bonds and money market accounts as desired. A variable universal life insurance policy is quite similar to a universal life insurance policy in the flexibility of it’s premium or death benefit; however, there is a higher risk with the cash value of the policy since it could either greatly increase or decrease in value depending on changes in the underlying investments. This type of a policy requires much more ongoing attention and maintenance by the policy owner than any other policy choice. Even though there is significant potential for a large increase in the cash value or death benefit it also caries with it a much greater degree of risk.
Choosing the right life insurance policy can be a challenging decision. While term life insurance is the most affordable short-term, whole life, universal life, or variable life insurance policies can offer a greater degree of flexibility and potential for an increased living and/or death benefit. Regardless of your financial status, life insurance should be a priority to cover your debts, protect your assets, and give your family peace of mind in the event of tragedy.