|
What are the different types of policies? |
The most basic feature of a life insurance policy is the death benefit: The lump sum payment your beneficiaries would receive if you die. There are two basic kinds of life insurance policies: Permanent Insurance and Term Insurance. Often, the solution is a combination of both, since most people have a need for both temporary (term insurance) and lifetime (permanent insurance) protection. |
| TERM | PERMANENT | Length of coverage | A specified term | Until age 100 or later, as long as premiums are paid. | Premiums | Based on your age and health, but typically lower than those of permanent insurance. | Initially higher than term premiums, but often level for life. | Cash Value | None. | Accumulates over time on a tax-deferred basis. | Key Advantage | Typically offers the highest death benefit for the lowest cost. | Offers lifelong protection and tax-deferred savings. | Key Disadvantage | Any number of factors (age, health status, etc.) could make it too expensive to continue coverage after the “term” expires. | Initially larger premiums could make it difficult to buy amount of protection needed. | Often, the solution is a combination of both! | | | Permanent Insurance:
Whole-life policies combine life coverage with an investment fund. Here, you're buying a policy that pays a stated, fixed amount on your death, and part of your premium goes toward building cash value from investments made by the insurance company. Cash value builds tax-deferred each year that you keep the policy, and you can borrow against the cash accumulation fund without being taxed. The amount you pay usually doesn't change throughout the life of the policy.
Universal life combines term insurance with a money market-type investment that pays a market rate of return. To get a higher return, these policies generally don't guarantee a certain rate.
Variable life and variable universal life are permanent policies with an investment fund tied to a stock or bond mutual-fund investment. Returns are not guaranteed. Term Insurance:
Term life insurance provides death protection for a stated time period, or term.
Term life insurance is perhaps the simplest form of life insurance. It was developed to provide temporary life insurance protection on a limited budget. Since term insurance can be purchased in large amounts for a relatively small initial premium, it is well suited for short-range goals such as life insurance coverage to pay off a loan, or providing extra life insurance protection during the child-raising years. |
|