Life Insurance

There are many types of life insurance policies that can help protect your family, and they all fall into two main categories: term and permanent.

With a term life policy, you get coverage for a defined length of time (say, 10 years). If you die during that time, money is paid to your beneficiaries – but when the term is over, you must get new coverage or go without.

Permanent life insurance (i.e., whole life and universal life) provides life-long coverage with a “cash value” component that can help with many objectives, like helping to build your retirement nest egg while providing protection for life and other financial benefits along the way.

What are the basic features of a life insurance policy?

At its core, a life insurance policy is a promise: to provide financial protection to your loved ones if you’re not there. The way a policy carries out that promise is defined by a few key features:

Types

TERM LIFE INSURANCE

Coverage for a specific term or length of time, typically between 10 and 30 years. It is sometimes called “pure life insurance” because, unlike whole life insurance, there’s no cash value to the policy. It’s designed solely to give your beneficiaries a payout if you die during the term. Most individual term policies have level premiums, so you pay the same amount every month.

When the term expires, there’s no more coverage – you either have to go without or get a new policy, which will likely come at a higher cost: the older you are, the more expensive it is to get a policy.

WHOLE LIFE INSURANCE

Is the simplest form of permanent life insurance, providing coverage that lasts your entire life. Like other permanent policies, it includes a cash value component: A portion of your premium dollars are placed into a cash value account, and this sum grows over time on a tax-deferred basis, so you don’t pay taxes on the gains. A whole life policy has three defining characteristics:

The level premium remains the same for life
The death benefit is guaranteed as long as the guaranteed premiums are paid
The policy includes guaranteed cash values that grow at a guaranteed rate

Cash value provides several significant benefits you can use while you’re still alive. It takes a few years to grow into a useful amount, but once that happens, you can borrow money against it, use it to help pay your premiums, or even surrender it for cash to live on in retirement.

UNIVERSAL LIFE INSURANCE

Is another form of permanent insurance that offers the cash value and lifetime coverage benefits of whole life. But there’s a fundamental difference compared to whole life: the premiums are flexible. With a universal policy, you can raise or lower the amount you pay into the policy as you see fit, within the limits of the policy. Paying in less could eventually result in the need to pay in higher amounts in later years to keep your coverage. This type of policy can adjust to your life circumstances while providing the same kind of cash value growth as whole life. Having another child, moving on to a different job, or taking out a loan to buy a business – all might be instances where a combination of security and flexibility becomes important.

FINAL EXPENSE INSURANCE

It is a form of life insurance intended only to cover end-of-life expenses such as funeral and burial costs. The coverage is permanent in the sense that if you keep paying premiums, the policy will remain in effect, but there is no cash value or investment component to these policies. Older people often buy final expense coverage without dependent children because it helps protect loved ones who might otherwise have to cover these costs out-of-pocket. While the premiums for these plans tend to be modest, the death benefit is also very limited – it’s not meant to provide years of financial support to your beneficiaries. Younger, healthier people who want to build cash value or a significant death benefit for their families will likely be able to find greater value in a whole life, universal life, or term life policy.

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