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Types of Life Insurance Explained

There are many types of life insurance with different features and benefits that meet different needs. Before you purchase a life insurance policy you need a basic understanding of the types of polices available.

Term Life Insurance Explained

Term life insurance provides coverage for a term of from 1-30 years. Annual premiums are paid to the insurance company to keep the policy in effect. If the policy owner dies during the term, his or her beneficiary is paid a lump-sum of cash. If the policy owner lives beyond the term, the policy expires, and no death benefits are paid.

There is no savings or investment feature to a term life insurance policy. The insured must meet medical conditions before obtaining a policy. The annual premium varies depending on the amount of coverage desired and the insured’s age and health. Because chances of death increase with age, standard term life premiums increase every year.

The pros of term life insurance are its affordability and the short term protection it provides with no risk. The cons include the temporary nature of the coverage, annually-larger premiums, and no gains on you investment. Term life policies work well if you want to pay off a mortgage in the event of your death or for other similar period specific life insurance needs.

Whole Life Insurance Explained

Whole life or permanent life insurance provides a lump sum payment to the beneficiaries upon the insured’s death. The advantage of whole life policies is they have no defined term, so as long as the premiums are being paid the policy will remain in force for life, or until the endowment age which is typically 100. This just means that if you live to the endowment age, the benefit is paid to you at that point and the policy is no longer in force. Another advantage of the whole life policy is that the cash value in the policy can be accessed in if the insured needs the funds or can no longer make the monthly premium payments.

The premiums for a whole life policy are more expensive than term insurance since the policy holder is covered for the remainder of their life. Often the premiums are flat or decrease over time. This is possible because the insurance company can invest part of the premium in bonds and equities and use the proceeds to cover the rising cost of premiums and/or to make a payment when the insured dies.

Whole life is typically purchased as part of an estate planning arrangement to make sure heirs are taken care of if you predecease them.

Universal Life Insurance Explained

Universal life is also called “flexible premium adjustable life insurance,” and is a more flexible version of whole life insurance. Similar to whole life, universal life includes a savings element that grows on a tax-deferred basis. A portion of your premiums are invested and the return on the investments is credited to your policy tax-deferred. Most policies guarantee a minimum return on your money. Universal life offers two death benefit options. One pays the death benefit out of the policy’s cash value; the more cash value you build up the less the policy costs the insurance company. The second option pays a fixed amount stated in the contract, plus any cash values you accumulated over the years and costs more.

Universal life policies give you the ability to adjust the death benefit as your needs change, as well as the flexibility to pay smaller or larger premiums for periods of time. However, you need to make a minimum premium payment as specified in the contract to avoid the policy lapsing.

Universal life like whole life is generally used as a part of an estate plan to ensure heirs are taken care of after your death.

Variable Universal Life Insurance Explained

The variable universal varies depending on the performance of the investments chosen by the policy holder.

Since the insured chooses the investments for a variable universal policy the risk and benefits of the investments accrues to policy holder. The policy allows the insured to choose among a variety of investments so the investment can be spread between higher and lower risk investments to ensure there is always some value to the policy and still take advantage of higher risk investments with the potential of higher returns. If the investments do well the policy holder does not have to pay a premium. If the investments perform poorly there is the risk the premiums will have to be paid or the policy will lapse.

Life insurance premiums vary within a set range and the cash value of the policy.

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Insurance Choices Work with a trusted financial advisor to have your options for life insurance explained fully before you make a decision as to which type of insurance to purchase.

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