Term Life Insurance: There are five different types of term insurance, annual renewable, convertible, decreasing, level and re-entry term. To keep it simple, a general overview of term insurance is a good starting point. Term Insurance is considered to be the most basic type that an individual can purchase. The main reason that term life insurance gets the “basic” title is the fact that this option only offers pure death benefit protection only, it does not offer any cash value build ups within the policy. (Rose, 2017) Coverage for term insurance can be purchased to cover several different lengths of time. Plans can range from ten years, 15 years, 20 years, 30 years and sometimes even longer. This plan is lower than other insurance plans, conversely, making it more affordable for younger people who are in good health at the time that the coverage is purchased. If the insurer outlives a current plan, they will need to purchase a new plan at their current age and health status. Financial advisor and expert Dave Ramsey endorses term life insurance as the best route to take. His viewpoints are that if you have a policy of term insurance in place at a low cost, an individual can then take the extra money from the low-cost premium and invest it in different forms of retirement accounts that will outperform what other different forms of life insurance offers.
Whole Life Insurance: Whole life insurance differs from term insurance as it offers a death benefit and cash value. With this coverage, the premium amount stays the same throughout the duration of the policy. This is beneficial to an individual when a policy is purchased at a young age as the advancement of age and health issues that may arise in the future will not impact the premium payments. Another additional benefit is for individuals who stick to a budget knowing that the price will always remain the same. (Rose, 2017)
The cash that is in the cash value portion of a whole life policy has the ability to grow on a tax-deferred basis. Essentially, these funds will not be taxed unless withdrawn allowing them to compound over a large amount of time. When purchasing a whole life policy, a large amount of the premium goes to pay the fees for the first five years and another portion maintaining the death benefit. During the duration of the policy, the fees portion will decrease and more of the premium will be put directly into funding the cash value. With the fees and added features, a whole life insurance policy can cost four times as much as a term life policy. (Policygenius, 2018)
Universal Life Insurance: Universal life insurance is similar to whole life insurance, whereas, the policy provides both a death benefit and a cash value portion where the funds are able to grow tax-deferred. The difference between universal and whole life is the flexibility that universal has to offer. With certain stipulations, a policyholder of universal life is allowed to choose how much of their premium dollars will go towards the policy’s death benefit or to the cash value of the policy.
Since universal life is a permanent policy, the policyholder will have the ability to retrieve the cash in the cash value portion of the policy at any time for any reason. Many people use this to pay off debt, major purchases, increasing retirement income or even using it for a lavish vacation.
Variable Life Insurance: This type of life insurance has a death benefit as well as a cash component. This policy offers a different way in how the policy holder can use the cash value within it. In essence, it’s more along the lines of investing in the stock market. The cash value is basically put into a “sub-account” where some decent growth can happen within it. Two downsides to variable life insurance is that a policyholder can lose money depending on how the market is performing, and also having limited options on where to put the money in the market. More options are available that you can invest in on your own than being limited to what the policy maker offers.
Variable Universal Life Insurance: Variable Universal Life is a policy that combines variable and universal life insurance. This option is a rather popular insurance policy because it gives the holders the option to invest as well as change the insurance coverage easily. Similar to universal life insurance, holders have the ability to choose the amount and the frequency of premium payments, consequently, they have specific limits that must be kept. An individual with this plan may also make a lump sum payment within certain limits or use the accumulated cash value toward premium payments. (Dave, n.d.)
Survivorship Life Insurance: In a survivorship policy, two or more people will be covered. These policies can be set up in several different ways. One way is when the first person passes away the payout will then go to the surviving members on the policy. One reason why people choose this option, is the fact that often times it is cheaper to have one higher policy then two lower policies. There are also joint and survivor insurance policies, these pay out when the second person on the coverage passes away and also might be cheaper than having two or more separate life insurance policies.
Life Insurance is a product that all people should have in one way or another. Life can throw many different hurdles and obstacles in an individual’s life. Having life insurance can help relieve stress and sadness that may arise. With the many different options to choose from, an individual can seek out the type that can benefit themselves, their family and future generations within it.
Works Cited
Dave, P. (n.d.). Variable Vs. Variable Universal Life Insurance. [online] Investopedia. Available at: https://www.investopedia.com/articles/pf/07/variable_universal.asp [Accessed 24 Mar. 2018].
“Different Types of Life Insurance Policies, Explained.” Policygenius, Policygenius, www.policygenius.com/life-insurance/types-of-life-insurance/#term-life-vs-whole-life.
Rose, Jeff. “Life Insurance 101: Types of Life Insurance Explained.” Good Financial Cents, 13 June 2017, www.goodfinancialcents.com/types-of-life-insurance-policies-explained/.