A life insurance policy is a contract between a person and the insurance company. The insured pays premiums on the policy. If the policyholder should die, the company sends a claim or death benefit to the beneficiaries.
As a risk management tool, life insurance can be important to a strong financial strategy. Death is not pleasant to think about, but planning for it is a necessity. With a policy in place, the insured’s beneficiaries are protected.
Life Insurance for Protection Today and Tomorrow
There are different types of life insurance, each designed to meet specific needs. If the insured (who is married, has children, and a mortgage) should die, the death benefit could protect surviving family members. Among the ways insurance can be used include:
- Replacement of lost potential future income
- Part of an estate planning strategy to help preserve wealth
- Long-term income replacement when the need extends beyond the working years
- And more
The Types of Life Insurance
One of two types of insurance, term life insurance is often referred to as “death benefit only” insurance. It’s generally the least expensive option and provides protection for a pre-defined period of time, or term. These typically range in five-year increments up to a maximum of 30 years. The premium is a fixed payment amount and remains unchanged for the duration of the policy’s term. If the insured dies during the term, the full death benefit will be paid, in one lump sum, to the beneficiary. If the term expires and the policyholder is still alive, there’s no death benefit and no cash surrender value. There is typically an option to renew the policy, but it will usually be at a higher rate.
Permanent life insurance is designed to provide lifetime coverage, rather than protection for a defined period of time. A benefit of permanent life insurance is the savings component, which accumulates, tax-deferred, over the term of the policy. It builds cash value. This means the policyholder can borrow against the insurance, or even cash it in if it’s no longer needed.
Different Types of Permanent Life Insurance
There are several types of permanent life insurance, including whole life, universal life, indexed universal life and variable universal life. Whole life insurance is the most basic type of permanent life insurance. This option is more expensive than term insurance since it comes with specific guarantees. It has a guaranteed death benefit and a guarantee of cash at a future date. Premium amounts are fixed throughout the life of the policy.
Universal life insurance is a second type of permanent insurance that’s designed to provide lifetime coverage. Once the coverage is locked in, the policyholder has the flexibility to raise or lower premium payments or coverage level.
It’s best described as a flexible premium adjustable life policy. A policyholder can pay the minimum premium, which covers the cost of insurance. The owner has the option of contributing extra money that accumulates in an interest-bearing cash fund and can be used to offset future premium payments.
Other types of universal life insurance products include indexed universal life and variable universal life. These invest the additional accumulated cash in either underlying financial securities or an index that’s tied to the stock market.