Many material possessions we care for can be replaced; the people we love aren’t so easy.
Term life insurance offers the simplest type of coverage and the least expensive, at least at the outset. Coverage is in effect for a fixed term or period of time, usually 1 to 30 years. Most policies allow for renewal. The policy will pay your beneficiary a set amount of money if you die during the term of the policy. The younger you are, the lower the premiums; the premiums increase upon renewal as you age. It is important to note that these policies do not accrue a cash value.
Under the umbrella of permanent life insurance, there are three types: whole life, universal life, and variable universal life.
Offering protection as well as a cash value, a whole life insurance policy accrues cash value over time on a tax-deferred basis. It may also provide for dividends (which are not guaranteed) that can be used to add more coverage, or to build a cash value that you can use to supplement your retirement income or help provide for a child’s education—it’s your money to use as you need it. Premiums are fixed for the duration of the contract. It’s important to note that life insurance should be purchased primarily for protection, not solely for cash value accumulation.
These flexible life insurance policies are interest-sensitive and allow you to adjust the death benefit and/or premium payment (within limits) to fit your needs. Your net premium payments are applied to the accumulation fund, which earns interest. The monthly cost of the death benefit and policy administration is then deducted from the accumulation fund. As with whole life insurance, you may withdraw the cash value or borrow against it at any time. You can also use your cash value to pay premiums. Universal life rates are subject to change, but the rate will never fall below the minimum rate guaranteed in the contract.
Variable Universal Life
If you want to invest the cash value of your life insurance policy in various funding options that in turn invest in such things as stocks and bonds, variable universal life insurance may be for you. This policy allows you to decide how your net policy values will be invested, and you bear the investment risk. If the market doesn’t perform well, your death benefit may decrease. As a result, you may need to pay higher premiums to keep the policy in effect. However, if the market performs well, your cash value has the potential to grow more rapidly than with other cash value policies. Like universal life, premiums and death benefits are adjustable within certain limits.