Types of Life Insurance
Term insurance can provide low-cost coverage for a specific period of time (the "term") --most likely during an individual's peak earning years when death can cause the greatest financial hardship. Term is also a good option for covering needs that aren't permanent. For instance, you may decide that you only need coverage until your children graduate college or a particular debt is paid off, such as a mortgage, or a business responsibility is fulfilled. Generally the most affordable type of life insurance when initially purchased, term insurance generally pays a benefit only if you die during the select period of coverage.
If you buy a term policy and then later realize that you still have a need for life insurance, you can either renew your term policy or (depending on the insurance policy's rules about conversion) convert it to a different type of policy. If, in 10, 15 or 20 years you're still healthy according to the company's standards, you might re-qualify at a reasonable rate. But if your health has deteriorated, you may find that it's too expensive to renew your policy or you may not even re-qualify.
2. Universal Life Insurance
Universal life (UL) offers flexible premiums that can give you the option to make higher premium payments when you have extra cash on hand or lower premium payments when money is tight. Once the policy has enough cash value, the flexibility of UL insurance generally allows you to pay premiums at any time, in virtually any amount, subject to certain minimums and maximums of the policy guidelines. You also can reduce or increase the death benefit (which may reduce or increase your premium payment) should your needs change.1
In addition to the death benefit, another important characteristic of universal life insurance is a feature known as cash value or cash-surrender value. These types of policies can earn interest and build cash value over time, as well as provide a death benefit to your loved ones.
When you pay your premium, administrative fees, applicable rider charges and other insurance costs are deducted from the amount you paid. The balance of your payment is applied to your cash value account, and continues to build with each premium payment. The cash value account may also earn a current interest rate offered by your insurance carrier. Generally, over time your policy can develop a cash value available to you in the form of a policy loan2 or partial surrender.
Benefit features like a No-Lapse Guarantee1 can be very useful to help protect your policy. With an ordinary universal life product, the policy could lapse under certain circumstances (e.g., interest rates fall below projections, insurance costs or administrative expenses rise, etc, which can affect your ability to make premium payments). With a No-Lapse Guarantee, you're guaranteed that the policy won't lapse for a specified period of time as long as premium payments are made within the time frame outlined by the company.
1 Coverage is guaranteed for a certain number of years, depending on the policy selected, for all issue ages provided the no lapse guarantee premium requirement is met. If you do not meet the requirement significantly higher premiums may be necessary to keep the policy in force. Paying a premium that is equal to, but not greater than the no lapse guarantee premium will keep the policy in force but may result in a negative or zero account value. By paying only the no lapse guarantee premium you may be forgoing the advantage of building more cash values.
3. Indexed Universal Life Insurance
Indexed universal life insurance (IUL) is permanent life insurance that offers death benefit protection when loss of life occurs. Like other forms of permanent life insurance, your premium payments may earn interest and grow the cash values of your policy.
What differentiates IUL from other permanent life insurance is the way interest is credited to the policy. In addition to the company offering its own declared interest rate, IUL also offers an interest option linked to the movement of a selected stock market index over a specific period of time.
The manner in which interest is credited to your IUL policy gives you the potential for strong cash value accumulation. A key benefit to remember is that it offers protection in a poorly performing market. With IUL, you don't participate directly in the stock market and the credited interest rate is never less than zero percent, guaranteed!
Click the links below to learn more about indexed universal life.