Life Insurance comes in many different shapes and sizes. Between contract types, additional features, and issuing carriers, there are numerous options available to consumers. Without an expert hand to guide you, there may be missed opportunities.
While there is a wide variety in contacts and features, life insurance has two primary purposes: to obtain a death benefit and to build cash value.
The idea behind a death benefit is that, in the event of your death, your beneficiaries receive a payout that can be used to cover final expenses, replace income, transfer wealth, and otherwise provide resources. Although conditions and stipulations for a payout will vary amongst insurance contracts and issuing carriers, the basic benefit they all provide is a death benefit.
Some life insurance policies accumulate tax-deferred cash value, in addition to a death benefit. In many instances, this cash value can be accessed during the life of the insured, through policy withdrawals or loans. This can be useful to grow a death benefit, cover emergencies, or gain a source of retirement income. Keep in mind that the conditions and stipulations of cash value accumulation will depend on the life insurance policy, carrier, and elected features.
Types of Life Insurance
Life insurance policies generally fall into two main categories: term (temporary) and permanent.
Term Life Insurance
Term life policies provide protection for a specific timeframe, or term. This is usually in ten-year increments (e.g. 10, 20, 30). Should you die during this period of coverage, the insurance company issues a payout to your beneficiaries. If you survive the period, your coverage terminates, though you may have the option to renew for another period or convert to a different type of life insurance contract.
For individuals requiring a death benefit—and nothing more—a term life insurance may be an attractive solution. Because it only provides a death benefit, term life insurance will often incur lower premiums. However, it does not accumulate a cash value, nor does it retain value (less potential conversion credits).
Permanent Life Insurance
Permanent life insurance policies are designed to provide lifetime coverage for the insured. Generally, these policies will offer flexibility and tax-deferred cash value accumulation.
There are three main categories of permanent life insurance policies.
Whole Life Insurance provides coverage for your entire life, with a guaranteed rate of growth in the cash value component.
In addition to offering lifetime coverage, universal life insurance policies allow for flexible premium payments (as long as enough is paid to keep the contract in force) and the option for a level or increasing death benefit.
Fixed Universal Life
A fixed universal life insurance policy is very similar to a universal life policy, with the difference that the cash value is tied to either current interest rates or fixed to stock market index, such as the Standard & Poor’s.
Within these subcategories, there is, of course, more variation. This is why it is helpful to have a knowledgeable and experienced professional guide you through your life insurance options.