Individual Life Insurance
Cash Value or permanent insurance pays a death benefit whenever you die – even if you live to 100! There are three major types of whole life or permanent life insurance – traditional whole life, universal life, and variable universal life, and there are variations within each type from indexed life to Adjustable Life as well. One should consult a professional before attempting to choose between the many forms of Cash Value insurance available.
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Term Life Insurance:
Term Policies provide life insurance for a specified period of time. These policies provide benefits in the event of death, but they generate no cash value. Keep in mind that the cost of term insurance increases as you get older, which may make it more expensive than cash value insurance in the long run. Most companies will not sell term insurance to an applicant for a term that ends past his or her 80th birthday.
Benefits of Term Life Insurance provides life insurance for a specific period of time, or “term”. Term life insurance provides only “pure” insurance protection and does not have the savings feature typically found in most permanent “cash-value” life insurance policies. This type of insurance offers the users a choice of terms from 1 year renewable up to 30 year terms. The renewable options are usually only available for the shorter terms, 1 to 5 years. The premium for the term remains the same throughout the term, the most popular nowadays is the 20 year term. In certain cases you can also opt for a term to a specified age, usually 65.
Term life insurance is most useful when an insured person is relatively young and the need is for temporary or short-term coverage. Young, growing families with limited income and a high insurance need represent one situation where term life insurance works very well. Situations where a need will decline over time, such as with a home mortgage, are also good candidates for term life insurance. The younger you are when you take out a term policy, the cheaper the premiums. Because the premiums will not increase over the term, the longer the term the more money you save. Thus a young person can have a very high insurance death benefit for a relatively small premium up to the age of 65.
Another benefit may be “Return of Premium” as some insurers have created term life with a “return of premium” feature. The premiums for the insurance with this feature are often significantly higher than for policies without it, and they generally require that you keep the policy in force to its term or else you forfeit the return of premium benefit.
Annual Renewable Term Life Insurance Defined: Annual renewable term life insurance is term insurance that renews every year. With term life insurance, you are covered only for the specified term of the policy. Most term life policies last between five and thirty years, at which point you either renew or no longer have coverage. However, with annual renewable term life insurance, the policy covers you only for one year, at which point you have the option to renew.
Benefits of Annual Renewable Term Life Insurance
Annual renewable term life insurance provides you with a flexible life insurance option. Since the policy renews on a yearly basis, there is no long-term commitment to pay premiums or buy coverage. As such, this can be a great option for people who need coverage only for a period of time, such as when they are in between jobs.
Annual Renewable Term Life Insurance Premiums: Affordability is another advantage of an annual renewable term life insurance policy. The premiums, initially, may be much lower than you would pay for a long-term policy. This is because there is less of a statistical chance that you will die within the yearlong period, as opposed to a higher risk that you might die over five, fifteen or thirty-year terms which are common in term life policies.
However, as you age, your premiums generally increase slightly each year. Thus, unlike standard term life insurance with a longer period, you will pay more as you age instead of having a fixed premium for the life of the policy. In addition, eventually you may age-out of being able to buy coverage, or coverage may become prohibitively expensive when you get older.
Disadvantages of Annual Renewable Term Life Insurance Policies: The major disadvantage of annual renewable term life insurance is the relatively short period for which you have protection. At the end of the yearlong period, you may be unable to afford the increase in premiums, especially if your premiums increase directly. Furthermore, if something happens to you- such as getting diagnosed with a terminal illness- it may be difficult or impossible to renew your policy unless the insurance contract states that the insurer must renew at a capped maximum.
Should You Choose An Annual Renewable Term Life Insurance Policy? If you do not have the money to afford larger monthly payments for a longer periods of time this will fill a short term need.
Universal Life Insurance or Individual Life Insurance: offers you more flexibility than whole life insurance. You may be able to increase the death benefit, if you pass a medical examination. The savings vehicle (called a cash value account) generally earns a money market rate of interest.
Benefits of Universal Life Insurance Universal Life: is similar in some ways to, and was developed from whole life insurance. The advantage of the Universal Life policy is in its flexibility and the potential for greater cash value growth. It offers you the chance to change the policy (within limitations) to suit your changing needs. If things go well, you can increase the investment part of the policy to take advantage of higher growth rates. If you find yourself with financial difficulties, you can use the accumulated cash to continue premium payment.
Universal Life Insurance or Individual Life Insurance offers you more control over your insurance needs with the following benefits:
Tax-Free Death Benefits
Flexible Protection: Universal Life products give you the flexibility to choose the amount of protection that best suits your family or business. It allows you to increase or decrease coverage as insurance needs change. Increased coverage may be subject to underwriting requirements.
Flexible Premiums: With Universal Life insurance, you control the amount and frequency of payments. Looking towards the future you have the option to increase the premium or make lump sum contributions, subject to limits as specified in the policy. The extra dollars grow tax-deferred, and may increase the cash and death benefit values.
Tax-Free Death Benefits: Under current tax laws governing individual life insurance, life insurance proceeds are generally income tax free to the beneficiary.
Guaranteed Return: Normally, there is a guaranteed minimum interest rate applied to the policy. No matter how badly the investments go by the insurance company, you are guaranteed a certain minimal return on the cash portion. If the insurance company does well with its investments, the interest return on the cash portion will increase.
Whole Life Insurance:
(also known as straight life, ordinary life, and traditional permanent insurance) has guaranteed premiums and death benefits, and a minimum interest rate, which will be credited to the funds accumulated in the policy. Benefits of Whole Life Insurance, are that part of your premium is applied toward the insurance portion of your policy, a small part of your premium goes toward administrative expenses, and the balance of your premium goes toward the investment or cash portion of your policy. Unlike term policies, you will not have to die to realize some portion of your investment.One of the benefits of this type of policy is that the cash value portion of Whole Life insurance belongs to the insured. You can take it out in the form of policy loans or you can cash the policy in. An advantage to Whole Life is that the interest you accumulate through the investment portion of your policy is tax-free until you withdraw it. You can also use the cash value to pay premiums. If unexpected expenses occur, you can stop or reduce your premiums. The cash value in the policy can be used toward the premium payment to continue your current insurance protection ? providing there is enough money accumulated. Another advantage of Whole Life insurance or Individual Life Insurance is that the premiums are fixed. Regardless of your age or health, you pay the same amount for the coverage each year.
For people who take out Whole Life insurance early in life, the investment part of the premium can build up substantially, especially in later life. This can provide a very nice lump sum on retirement. You can also use any built up lump sum to cover your children’s education. Whole Life policies with sufficient accumulated capital can also be used as loan guarantees for a bank.
Indexed universal life insurance is a type of permanent life insurance or Individual Life Insurance – a life insurance policy that stays in effect for your whole life as long as the premiums are paid (as opposed to a term life insurance policy, which expires after a set amount of time). Other types of permanent life insurance include whole life insurance, variable life insurance, and universal life insurance.
All permanent life insurance policies are split into two parts: the death benefit (which pays out a sum if you die), and cash value portion that can gain value over time. With universal policies, policyholders can adjust the death benefit within limits, and can use gains from the cash value to pay for premiums.
What makes indexed universal life insurance unique is the “indexed” part. These policies have a minimum guaranteed interest rate (so you won’t lose money), but the interest rates aren’t fixed; instead, they’re based on an index chosen by the insurer.
An index is essentially a group of investments like stocks or bonds. The S&P; 500 and the Nasdaq 100 are examples of indexes. The insurer doesn’t directly invest in the market, but uses the interest rate of a determined index to settle on the interest rate for your policy based on the performance of the index.
A variable life insurancepolicy is a contract between you and an insurance company. It is intended to meet certain insurance needs, investment goals, and tax planning objectives. It is a policy that pays a specified amount to your family or others (your beneficiaries) upon your death. It also has a cash value that varies according to the amount of premiums you pay, the policy’s fees and expenses, and the performance of a menu of investment options—typically mutual funds—offered under the policy.
What Should I Do Before I Invest In A Variable Life Insurance Policy?
Know how it works. Look up key terms you might not be familiar with. Be prepared to ask your financial professional questions about whether the policy is right for you.
Figure out how much it costs. Ask what the fees and expenses are.
Get the details. Different policies have different features. Ask your financial professional for the policy prospectus, which will describe the policy you’re considering in detail. Read the prospectus carefully and ask questions about what you don’t understand.The prospectus is available free of charge. It contains important information about the variable life insurance policy, including fees and expenses, investment options, death benefits, and other features.