If you are shopping for life insurance for your family and are overwhelmed by all of the choices, the following brief descriptions of some of the more common options may be helpful.
Term life is the most common type of life insurance policy. This type of insurance is simple: you pay a premium based on the number of years the policy will be in effect, such as 10 or 30 years. If you die before the specified age, a pre-determined sum of money called the “death benefit” will go to your beneficiary who can use it for a variety of reasons, including the cost of final expenses or to replace your lost income.
The death benefit is the sole function of a term life policy; it does not accumulate cash value. Term life provides the best opportunity for many individuals who are looking at life insurance for the death benefit rather than as an investment.
A cash value policy provides the opportunity to purchase term insurance in combination with a savings or investment account that can collect interest, be used for loans and other functions. Some options allow the policyholder a greater degree of control of the cash value. A cash value policy is an attractive option for someone who understands the importance of the death benefit but appreciates the opportunity to grow the policy’s value over time.
A primary function of this form of life insurance includes a low-risk cash value account that accumulates on a tax-deferred basis. The cost of the insurance is fixed and does not change, provided the premium is paid. The policy also allows the policy owner to withdraw funds from the cash value, although the death benefit is reduced if that is done.
A primary function of this form of life insurance includes a risk-basis cash value account that accumulates on a tax-deferred basis. You have the option to borrow from the policy. The death benefit could change depending on the level of returns produced by the cash value account.
A primary function of this form of life insurance includes a low-risk cash value account that accumulates on a tax-deferred basis. The cash value account earns current market rates of interest. The policyholder has the ability to borrow or withdraw from the policy. There is greater flexibility in the premium.
Universal Variable Life
This type of life insurance offers the policyholder greater flexibility and more options. For example, cash value options are tax-deferred. Separate accounts are available for investments the policyholder is interested in, such as stocks, bond funds, and other opportunities. The policyholder can withdraw or borrow against the policy. The fact that it is tied to securities gives this type of policy a greater opportunity to grow. Conversely, it may not be ideal for someone searching for a more low-risk conservative product.