There are basically two types of life insurance – term life insurance and whole life insurance – with some variations within each type.
With term life insurance, you pay a fixed premium for a specific amount of life insurance for a specific period of time (the term), which could be 5, 10, 20, or 30 years. If you maintain your premiums, your beneficiaries will receive the face value of the policy should you die within the term of the policy. At the end of the term, the insurance policy is no longer in effect. However, many term policies can be renewed for an extended term. The disadvantage is that the premium amount will probably increase because you’ll be older then and, therefore, a higher risk.
Because the premiums for term life insurance are typically lower, this is a good type of insurance for younger people and those with limited income. It’s also a good investment to cover costs for children’s education and other expenses in the event of the death of a parent.
Term life insurance does not accumulate cash value, however, and many people feel they’re losing their money if they don’t have to claim the coverage because of death.
Another type of term life insurance, return of premium life insurance, directly addresses this problem. With this type of policy, the full amount of your total premiums is paid to you at the end of the policy term if you still survive. If you don’t maintain the policy to the end of the term, you may receive either no refund of premiums or a pro-rated amount of the total premiums.
The second type of life insurance, whole life insurance, is valid until the end of your life. If you continue to pay the premiums, your beneficiaries will receive the face value of the policy upon your death. Initially, premiums may be somewhat higher than a comparable amount of term life insurance because the policy is written on a definite event, your eventual death. However, the premium amount will not change as you age, and there is no need to renew and thus have an increase in premium.
Another characteristic of whole life insurance is that your policy will build cash value and earn interest which is added to the cash value. The cash value in the policy is tax-deferred and will be paid out to your beneficiaries upon your death, and it will not be subject to tax at that time. If you choose to discontinue the insurance coverage, only the cash value that exceeds the amount of your accumulated premium payments will be taxable. Another contributor to the cash value of a whole life insurance policy is dividends earned. Mutual insurance companies are owned by the policyholders, and if the business earns a profit, a percentage will be paid into your insurance cash value as dividends. This additional income will probably be tax-deferred and not subject to tax when paid out to your beneficiaries at your death.
Universal life insurance is another type of permanent life insurance. Like whole life insurance, universal life insurance will pay upon your death if you continue to pay the premiums. However, the premium amount for universal life insurance is based on speculation as to the interest rate and cash value, so your premium amount may increase over the life of the policy, or the policy coverage or cash value may change or be entirely discontinued.
Another variation of whole life insurance is survivorship or second-to-die life insurance which is written to cover two people and pays out at the death of the last surviving insured. This type of insurance is often used in estate planning to provide cash value to cover estate taxes which leaves the value of the estate intact for the heirs.
Your decision about the type of insurance policy you need is based on your individual circumstances. The primary difference to consider is that whole life and universal life policies are meant to be maintained for a long period of time whereas term life insurance provides coverage for a set amount of time.
Your Schultheis Insurance Agent can help you decide which type of policy is right for you and will work with a variety of insurance providers to identify the best policy coverage for you at the lowest premium rate.