For the top insurance broker, one question they hear frequently is about the different type of life insurance. They are often asked which type is the best and if everyone needs a life insurance policy. The primary purpose of life insurance is to protect families in the event that the primary earner in the family dies. It was initially designed for younger families who were in the phase of accumulating wealth. Early on, there’s not a lot of wealth to be had and it takes years of established employment to preserve wealth and set up the family for future years. Life insurance gives individuals a way to protect themselves and their families from exposure to personal risks such as having to pay off debts after a death, providing income for remaining family members, paying funeral expenses, or fulfilling other goals like helping to put kids through college. If a person provides the primary income for a family or are in business for themselves, life insurance can provide essential protection. It is important to know the types of life insurance available to you to help you protect your family.
Four Types of Life Insurance
Life insurance policies can vary greatly depending on the particulars of any given situation. Even if death benefits, costs or duration are the same there can still be some major differences between the different policy types.
Whole Life Insurance
This type of life insurance provides protection over the life of the individual who is insured. It can also be called “permanent coverage.” It has a cash value that grows at a guaranteed amount which is usually a very low interest rate. The premiums for this type of policy typically remain the same for the lifetime of the insured and the death benefit is also guaranteed. Payments made on a whole life policy are divided with one part being applied toward the insurance itself, another portion going toward the administrative expenses and the remaining balance going toward the investment or cash value of the policy. Interest accrued is tax free until monies are withdrawn. These types of policies typically have a higher premium than other types of policies but this is due to the fact that it acts as a savings and allows payment flexibility.
Universal Life Insurance
Universal life insurance is also known as adjustable life or flexible premium It is a branch off whole life insurance. It is similar to whole life in that it is a permanent policy which provides cash benefits based on the going interest rates. The one distinguishing feature is that the cash values and the amount of protection are adjustable even while the contract is in place. These changes are made when the needs of the insured change. The cash value will earn interest rates that are usually guaranteed to not drop below a predetermined level.
Variable Life Insurance
A variable life policy combines traditional protection and the savings features with investment funds which offers more growth potential. This type of life insurance policy has two very distinct components: a separate account and a general account. A general account is the liability account of the reserve of the insurance provider and isn’t allocated to individual policies. The separate account is made up of several different investment funds which are in the portfolio of the insurance company. These might include a money market fund, an equity fund, a bond fund or any combination of these three. Since this type of policy has the investment feature, the cash value as well as the death benefit can change. This is why it’s considered a “variable” life insurance policy. It does not have a pre-determined payoff amount.
Term Life Insurance
This life insurance is very basic and is less expensive than other types in general. Unlike other types, it does not build up a cash value and its protection is only for a determined and specific amount of time. The policy is designed to only provide a death benefit for a pre-specified period of time. If that time expires it can be extended, or it may be converted to another type of insurance coverage. However, if the policy is converted or renewed, it may bring a higher premium that what you were paying. You can choose to increase it as you grow older.
Cost of life Insurance
Example, a 35 year-old female nonsmoker would pay an average of $61 per month for $1,000,000 worth of life insurance with a 20-year term, and $23.90 per month for $250,000 worth of life insurance with a 20-year term.