Life insurance is one of the most versatile financial assets available to us. Few solutions carry as many tax advantages, may be used in as wide a variety of situations, and come at such a range of cost. We do not get this variety of applications without a wide array of policy options available to us – and this is where a breakdown can occur. With so many different types of life insurance, it is easy to miss owning the most suitable policy and thereby becoming dissatisfied with your coverage. We find a basic understanding of the different types of life insurance can do much to increase confidence and help you secure the right solution for your family.
Different types of life insurance fit different needs. Occasionally, a unique situation will arise where sophisticated planning and novel application of a particular policy is needed. Generally though, each type of life insurance correlates best to a specific need:
Term Insurance: Generally characterized by providing high death benefit for a relatively low cost over a finite period of time (i.e. a 20 or 30-year term policy).
We favor term insurance for two general purposes: 1.) “income replacement” and 2.) debt security. The “income replacement” is what we think of when we buy life insurance to protect our family; that, should something terrible happen to a family member, the decedent’s income continues to flow to the family from the death benefit paid out by the life insurance company. Another use is to protect against debt. A family may want life insurance to secure a mortgage or business partners may want life insurance to secure a loan they are taking for their company. Generally, term insurance is a perfect fit when there is a defined need that will last for a known period of time and costs need to be managed.
Universal Life Insurance: These policies provide a permanent death benefit with a variety of different premium schedules.
While this is a very versatile type of protective life insurance, we find this solution shines when clients are focused only on providing permanent death benefit protection for the lowest cost. Like other permanent life insurance policies, Universal Life offers cash accumulation features, different funding options and premium payment flexibility. Universal Life policies can be built to meet those needs but the most common application is providing the highest, permanent death benefit for lowest cost.
Whole Life or Cash Value Life Insurance: These policies provide permanent death benefit while building cash value inside the policy that can be accessed prior to the death of the insured.
Whole Life, or Cash Value Life as it is sometimes referred to, provides permanent death benefit coverage similar to Universal Life. The primary difference is that, because of the emphasis of a cash value account and other policy features, Cash Value Life generally carries the highest premium among the policies discussed here. Because of this, we generally seek out Cash Value not primarily as a means of providing life insurance coverage but instead, as an accumulation asset. Clients can fund a Cash Value Life Insurance policy, earn a rate of return on their premiums, and later use the cash values as another pool of money. Because it is life insurance, Congress provides favorable tax treatment to this asset. When coupling the taxation and the returns on the premiums clients pay in, this policy represents a compelling option as another account to build up cash.
We hope the information provided here better equips you to perceive what type of life insurance coverage matches most closely with your financial needs. Just know that we are here as a resource to you when the time comes to personal financial planning and evaluating and building your life insurance portfolio!
This material contains only general descriptions and is not a solicitation to sell any insurance product or strategy as it does not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. For information about specific insurance needs or situations, contract your insurance agent. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information.