Life insurance is a contract between an insurance policy holder and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money in exchange for a premium, upon the death of an insured person. Depending on the contract, other events such as terminal illness or critical illness can also trigger payment. The policy holder typically pays a premium, either regularly or as one lump sum. Other expenses, such as funeral expenses, can also be included in the benefits.
Term Life Insurance for a specified period of time
With term life insurance, coverage is purchased for a certain length of time, such as for ten years, 15 years, 20 years, 25 years, 30 years – and in some cases, even longer. There is also a 1-year renewable term life insurance option that is offered
Lifetime protection with Whole Life Insurance
- The simplest type of permanent life insurance coverage is whole life. With this type of coverage, the premium amount is locked in and will remain the same throughout the entire lifetime of the policy. This can be helpful for those who need to stick to a budget. It also means that if a person purchases a whole life policy at a very young age, they will still pay the same amount of premium when they get older – regardless of advancing age, or even an adverse health issue.
- In some cases, where a person’s pre-existing conditions require the individual to buy high risk life insurance, some graded whole life policies are the only option.
- The cash that is in the cash value component of a whole life insurance policy is allowed to grow on a tax-deferred basis. This means that the gain on these funds will not be taxed until or unless they are withdrawn – allowing them to compound exponentially over time.
- At first, the cash in a whole life insurance policy will grow slowly. This is because the majority of the early premium dollars will go towards paying the agent’s commission and the insurance costs. However, over the years, the cash in a whole life policy can steadily grow, often with a minimum guaranteed rate of return.
- Some whole life insurance policies will even provide dividends to their policyholders. Because these are considered to be a return of premium to the policyholder, they are also not taxed. Dividends can also help the cash value in a policy grow significantly – although they are never guaranteed.
Flexible premiums and optional guarantees with Universal Life Insurance
Another form of permanent coverage is universal life insurance. This type of life insurance also provides a death benefit and a cash value component where the funds are allowed to grow tax-deferred.
Universal life insurance is more flexible than whole life coverage, though. This is because the policyholder is allowed – within certain guidelines – to choose how much of his or her premium dollars will go towards the policy’s death benefit, and how much will go towards the policy’s cash value.
Because universal life is a permanent life insurance policy, the policyholder will have access to their cash value account. So, just as with a whole life plan, the cash can be borrowed or withdrawn for any reason – including paying off debt, supplementing retirement income, or even going on a vacation.
Protection and investment options with Variable Universal Life Insurance
- Variable life insurance is also a form of permanent life insurance coverage. These types of life insurance policies offer a death benefit, as well as a cash component. However, with variable life insurance, the policyholder can take part in a variety of different investment options such as equities.
- This means that their funds have the opportunity to grow a great deal more than the funds in a whole life policy can. It also means that there can be more risk as funds are exposed to the ups and downs of the equities market.
- It is important to note that while the policyholder can increase their funds based on market movements, their cash is not invested directly in the market. Rather, it is invested in “sub-accounts” by the insurance company.
- With a variable life insurance policy, the death benefit may go up or down – however; it will not go below the set guaranteed amount. This is usually the original amount of death benefit that is purchased at the time of policy application.