When doing estate planning or just protecting your family, life insurance is usually a key component of the process. You can provide financial protection for your family or your business in the event of your premature death. But, like many issues we have written about life insurance, while we know what it is, the different options can be very confusing.
There are basically four types of life insurance options, each accomplishing a variety of goals:
Term life insurance – Term life insurance is straightforward. Term plans offer guaranteed protection for a specific period of time at a fixed premium. It is temporary insurance that you only have while you may the premium. At any time during the life of the policy, you do not pay the premium, the insurance lapses and you have no insurance or value. It is also the most affordable insurance sold. An option available on a term policy is that if your needs change, you may be able to convert the term policy (temporary insurance), to permanent life insurance, giving you lifetime protection with the opportunity for cash value accumulation potential.
Universal Life Insurance – Universal life insurance is permanent insurance that provides lifetime protection and accumulated cash value. With permanent insurance, you are buying a policy that pays a stated, fixed amount on your death. Part of your premium goes towards building cash value from investments made by the insurance company. Universal life combines insurance with money market type investment that pays a market rate of return. The amount and frequency of your premium payments can be adjusted with certain limits. You can access money for the policy via withdrawals and loans. However, this will decrease the cash value and death benefit if the amount borrowed is not repaid.
Indexed Universal Life Insurance – Index Universal Life Insurance is permanent life insurance. It offers the same features as traditional universal life insurance, but the interest earned on the investment portion of the premium is linked to the performance of the index account (such as the S&P 500), while protecting the policy’s cash value from market risk. It is important to understand that the policy does not directly participate in any stock or equity investments. Account value will vary depending upon the performance of the indexed account options selected. You can access money from the policy via withdrawals and loans. However, this will decrease the cash value and death benefit if the amount borrowed is not repaid. There is a flexibility to switch between the different premium allocation options as your needs change over your lifetime.
Variable Universal Life Insurance – Variable Universal Life Insurance offers permanent lifetime insurance protection, flexible premium payments and the ability to build cash value. Cash value is built by choosing from a variety of investment options across risk categories. Variable universal life policies have the potential for greater growth as well as the risk to lose cash value. You must be comfortable with market fluctuations in order to consider this type of life insurance. The policies account value will vary depending upon the performance of the investment part of the premium (which is not guaranteed). You can access money from the policy via withdrawals and loans. Keep in mind that this will decrease the cash value and death benefit if the amount borrowed is not repaid. You can transfer funds among different investment options to allow you to develop a strategy that works for you as your needs change over your lifetime.