Studies show that just over half of Americans have life insurance protection. Nearly most of that protection is through group insurance with an employer. The other protection is through an individual policy with an insurance company. Because the purpose for life insurance is to protect your family from the unexpected, it is important to understand what type of life insurance is best for you and your family.
As mentioned, group insurance through an employer is the most familiar type of life insurance. Group insurance is typically term coverage, meaning not permanent coverage or coverage that lasts throughout your life span. The coverage is usually only one to two years of your salary. This amount can be significantly lower than the amount that is needed to provide for your family if the unexpected happens. A positive outlook on group insurance is that you do not have to quality for coverage. You do not have to worry about being declined due to health impairments. Just being an employee (a full-time employee in most cases) qualifies you to be a part of the pooled coverage with all other employees. The downside to group coverage is the loss of coverage once you leave the company. When you or your employer terminates your employment, your group life insurance coverage is terminated as well. Hence, leaving you vulnerable and unprotected from the unexpected.
Because many find that having group insurance alone is not adequate coverage for their family needs, they purchase individual plans through an insurance company. If this is something you are contemplating, here are the main types of life insurance plans to consider:
Term insurance is a short-term type of life insurance that is known as temporary insurance. However, it is the most common type of coverage. It lasts for a specific number of years, such as 10, 20 or 30 years. Once the number of years is reached, the coverage is terminated and a new plan will need to be purchased. The concern with purchasing a new plan is that it will be based on your current age and current health condition. This can cause the new premiums to be much higher than the plan that just terminated.
The most favorable aspect of term insurance is the relatively low premiums. Premiums are more budget friendly, compared to permanent insurance, when purchased with a larger benefit amount (amount that is paid to the beneficiary if the unexpected happens). Although the premiums start out much lower, the premiums are not level. This means the premium will increase each year until the plan terminates.
Another concern to term insurance is that there is no cash value that accumulates from the paid premiums. The premium is basically a payment for a death benefit for your family if the unexpected should happen within 10, 20 or 30 years, whichever plan is purchased.
WHOLE LIFE INSURANCE
Whole Life insurance is a long-term type of insurance that is known as permanent insurance. Whole life insurance coverage is designed to last your entire life and not terminate after a specific amount of time, like term insurance. These plans have level premiums, which means they do not fluctuate or change year-by-year. They remain the same throughout the life of the policy.
A favorable aspect of whole life insurance is that once you qualify for coverage, you are set. Your age and health are assessed at the time of purchase only. Once coverage is in place, you will not have to worry about re-qualifying at a later date, like when a health impairment develops. This is of course as long as the premiums are paid and no lapse in coverage has occurred.
The best time to purchase whole life is at a younger age. This is not to discourage purchasing coverage at an older age. You have to keep in mind that you have to qualify for coverage and your health is typically better at a younger age, so the premiums are lower. Because an older policy owner has a shorter amount of time to make premium payments into the policy, the premiums are much higher than a younger policy owner.
Another favorable aspect of whole life insurance is the ability to build up cash value in the policy. The policy contains a savings account that accumulates cash value on a tax-deferred basis. At least a portion of this money can be accessed at any time by the policy owner with no tax consequences and be used for any purpose. On older whole life insurance policies, the cash value generally grows at a low interest rate.
VARIABLE UNIVERSAL LIFE
Variable Universal Life insurance is another type of permanent life insurance. The big difference between this type and other permanent insurance plans is that Variable Universal Life insurance has cash value but is does not pay a fixed or guaranteed rate of return. The cash value is invested in variable sub-accounts within the life insurance policy. These sub-accounts include funds like stocks, bonds, cash and real estate. The policy owner can choose which sub-accounts the cash value is invested in.
Both the amount of cash value in the policy and the death benefit will rise and fall based on the performance of the sub-accounts. If the sub-account values fall below a certain level, then you will have to make an additional deposit of premium in order to keep the policy in force.
Variable Universal Life plans typically do not allow loans or withdrawals on the cash value. However, you can surrender the cash value which may be subject to surrender charges.
UNIVERSAL LIFE INSURANCE
Universal Life insurance is another type of permanent life insurance. It is designed to provide lifetime coverage as the other permanent plans. Unlike the other permanent plans, universal life insurance premiums are flexible and may allow you to raise or lower the premium or benefit amount throughout the life of the policy.
Universal life insurance plan has a cash value account. The cash value grows at a rate determined by the insurance company, but it is usually guaranteed to never drop below a certain rate.
Universal life insurance plans can be surrendered for its cash value as well as allow for loans or withdrawals to be taken on the cash value. Withdrawals and surrenders are subject to surrender charges.
INDEX UNIVERSAL LIFE INSURANCE
Index Universal Life insurance is a newer type of permanent life insurance. Like the Universal Life plan, premiums for the Index Universal Life plan are flexible. Within limits, you can decrease your premium or skip a payment. However, if you skip premium payments and do not have enough cash value to cover the costs of insurance, your policy could lapse, meaning your policy is no longer in force and no death benefit will be paid out to your beneficiary if the unexpected happens.
The cash value in the Index Universal Life plan shares a relationship with the stock market index. The cash value is not directly invested in the stock market, but it mirrors the activity of the stock market. If the stock market goes up, you get some of the upside as well. The favorable aspect of this plan is that your exposure to the downside of the market is minimized.
With the many different types of life insurance plans, it is important to understand the differences and the benefits of each type. The type of life insurance as well as the amount of coverage is based on you and your family’s needs and goals. One of the main reasons for life insurance is to protect your family against financial devastation if the unexpected should happen. In recent years, another purpose for life insurance has developed. Americans are capitalizing on the living benefits that life insurance provide, such as college tuition, funding business endeavors, and creating an additional income stream during retirement. With that, it is crucial that you review your current coverage and determine if what you have in place is sufficient to protect your family as well as adequate to assist with financial goals while you are living.
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