Life insurance pays out a lump sum payment to the person covered by the
policy when they die.
It is one of the most important financial decisions and can ensure your spouse
and children or other dependents won't be burdened with debt when you're no
longer there to care for them yourself. There are two types of life insurance,
Term and Permanent.
Term Life Insurance
Term life is simple, cheap and provides the largest cash benefit for your dollar
but do not accumulate cash values. A specific lump sum is paid to the policyholder
upon death and is sold terms of 5, 10 or 20 years. Your monthly premium will remain
fixed throughout the tenure of your term. To make it simple, the death benefit and
the term policy limit are the same, which means a $100,000 policy pays a $100,000
death benefit. Some term life policies are renewable for an additional term or more,
but your premium will be higher every time you renew. This type of policy can be
converted to a permanent policy at any time prior to age 75.
Permanent Life Insurance
Permanent life insurance provides death protection for as long as you live.
The premiums rarely change and guaranteed cash values can allow you some
flexibility in case of emergencies.
- Whole life insurance
The primary advantages of whole life are guaranteed death benefits and cash
values, fixed annual premiums and any mortality or expense charges will not
make the cash value lower within the policy. It also has nonforfeiture
benefits so you do not lose or forfeit the policy when you stop paying
premiums.
The disadvantages are premium inflexibilities and very low interest rates.
- Variable life insurance
Variable life insurance provides stable death benefit protection and is the
type of life insurance with account flexibility for the more risk-oriented
policyholder. It offers low-risk, tax-free cash accumulation through the
investment of the cash value amount. The return from this investment is
usually promised to be on higher side and is variable.
- Universal life insurance
Universal life insurance is more flexible with separate accounts. The
investment portion of your universal plan will be invested in a money
market account whereas the cash value portion will be placed into an
accumulation fund. Apart from the regular death benefit, it allows
you to earn market rates of interest on your cash value account and
the right to borrow or withdraw from the policy during your lifetime.
- Universal Variable life insurance
Universal variable life insurance offers more features than any other
and gives you more control of cash value account. It offers premium
flexibility, low-risk tax deferred cash value options and separate
accounts for you to invest in. (i.e. money market funds, stocks,
bonds, etc.)
How to Choose a Life Insurance Policy
You need to find a policy you can afford with benefits and premiums that match your present and future needs. Below are some more tips:
- Decide on the right kind of life insurance plan for your family and
desired coverage amount
- Affordability of the premium amount
- Compare the life insurance plans offered by different insurers
- Evaluate the net payment and surrender cost indexes of each policy
- Buy a life insurance policy from a reputable insurance company
- Verify the various offers and claims made by insurers
