Life insurance originated as a method to provide a safety net for people who depend on the policy holder for financial support. Life insurance offerings include financial products such as annuities that provide benefits in retirement as well as benefits for your family after you die. There are hundreds of life insurance companies and types of policies to choose from to make life insurance safety part of your financial planning.
Purchasing
Your employer may offer life insurance as part of its employee benefits program or you may purchase an individual policy. Insurance agents sell policies to individuals and can help you select the type of life insurance that works with your financial situation and future needs. Remember that insurance agents are selling a product and their interest is not necessarily the same as yours. Because there are many types of life insurance and the costs and risks vary significantly, professional, unbiased help is desirable before you commit to purchase.
Term Life
Term life insurance is purchased by individuals for 10 years, 20 years or other specific period. If death occurs during that time, the face value of the policy is paid to the beneficiary. At the end of the coverage period, beneficiaries receive no payment in the event of your death. Term life insurance policies are less expensive than other types of life insurance. Some term life insurance policies allow renewal after their initial period of coverage, but the rates increase at renewal.
Whole Life
Whole life insurance, also known as ordinary life insurance, provides the insured's beneficiaries with a guaranteed death benefit and accrues a cash value because part of your premium is invested and earns tax-deferred interest. The premiums on whole life policies are fixed when the policy is purchased and do not change during the payment period. You may take a loan from the cash value of your whole life policy. However, this will reduce the death benefit unless it is paid back.
Universal Life
Universal life is more flexible than a whole life insurance policy because neither the premium payment nor the death benefit is rigidly fixed. Like whole life, universal life uses a portion of your premium for investment to build cash value in the policy. However, with universal life policies, your required premium payments can fluctuate with the performance of the investments and the interest earned may be applied to future payments. You can also add money to your universal life policy's cash value as part of a savings strategy. Universal life insurance offers two choices on payment to your beneficiaries---a specified death benefit amount that allows your expenses to be reduced as the cash value of the policy increases or you can choose to keep the payment fixed and increase your death benefits as the cash value increases. Because you accept part of the risk in maintaining the value of the policy, universal life insurance is less expensive than whole life insurance.
Variable Life
Variable life insurance allows you to invest the policy's cash value in professionally managed funds, which are part of the insurance company's portfolio and may include stocks, bonds, or money market funds. The mixture of investments is chosen by the policy owner and may be shifted among investments. If investments do well and produce a high rate-of-return, this creates a greater value and death benefit than a whole life policy with the same premium amount. These types of policies have a high growth potential, but also more potential risk of loss. Because of the potential investment risk, variable life insurance policies are sold as a prospectus.
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