Life insurance is a contract between the policy owner and the insurer (insurance company). The insurer agrees to pay a lump-sum of money (known as The Benefit) at the death of the insured individual. In return, the policy owner agrees to pay a stipulated amount called a Premium. The beneficiary receives the insurance “Benefit” should the insured individual pass away.
The purpose of life insurance (regardless of type) is to provide financial protection to your family/beneficiaries in the event you die. The life insurance funds can be used to replace the loss of income, final expenses, probate costs, taxes, and many other financial responsibilities that may arise.
Life insurance policies can also have riders that attach to the policy for an additional fee. A rider amends the original standard policy provisions and is not an independent product. Keep in mind any rider that provides an additional benefit will add to the cost the policy. To determine if a rider is a good fit for you, speak to a licensed insurance agent and review all available optional riders.
Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable by having the policy pre-approved. Be sure to check the credit worthiness of the insurance company. Insurance company ratings can be found on-line at insure.com or AMBest.
Different types of life insurance:
Basically, there are two types of life insurance: Term Life and Permanent Life.
If you need coverage for a certain period of time and cost is a factor, term life insurance may be a better option for you. It only offers death benefit protection and there is no cash value accumulation. Generally term life insurance is lower in cost than permanent life coverage.
Permanent Life Insurance
If you are looking for coverage that provides added flexibility and the ability to build cash value over your entire life, you may want to consider a permanent life policy. There are five types of permanent life insurance policies:
- Whole Life – Provides protection for your entire lifetime as long as the policy is in force and the policy does not lapse due to non-payment; provides guaranteed level premiums, tax-deferred cash value build up, and guaranteed death benefit. This type of policy carries a higher premium than term life, and is the most expensive type of life insurance because of the strong guarantees.
Variable Whole Life – Provides protection for your entire lifetime as long as the policy is in force and the policy does not lapse due to non-payment; provides some flexibility with premiums and death benefits, tax-deferred cash value build up (not guaranteed), and minimum guaranteed death benefit. Offers you a choice in investment funds just like with Variable Universal Life (see below).
- Universal Life – Provides protection for your entire lifetime as long as the policy is in force and the policy does not lapse due to non-payment; offers the flexibility to adjust premium payments as your financial needs change (after cash value becomes available), tax-deferred cash value build up, the ability to borrow against cash value, and adjustable death benefits that can be increased or decreased by the owner (subject to insurability). This type of policy carries a higher premium than term life.
Indexed Universal Life (IUL) – this is the same as Universal Life with the ability to allocate cash values to an account that credits earnings based on movement in an index such as the S & P 500. The advantage is you may realize earnings based on an upward movement in the market, but there is no downside, meaning your earnings will not go below zero.
- Variable Universal Life (VUL) – This is the same as Universal Life, but with the addition of the option to choose from a number of separate investment accounts (similar to mutual funds). Any earnings are tax-deferred. Because of investment risks, a VUL is considered a securities contract and is regulated under federal securities laws. The insured takes on the risk of the investment instead of the insurance company. This is a complex product that requires careful planning and monitoring.
Contact one of our licensed insurance professionals to obtain more information.
The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable by having the policy approved. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications. The cash value of a VUL policy is not guaranteed. The investment return and principal value of the variable subaccounts will fluctuate. Your cash value, and perhaps the death benefit, will be determined by the performance of the chosen subaccounts. Withdrawals may be subject to surrender charges and are taxable if your withdraw more than your basis in the policy. Policy loans or withdrawals will reduce the policy’s cash value and death benefit, and may require additional premiums payments to keep the policy in force.