What Type Of Policy Should You Buy?

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Term insurance generally provides a death benefit only. Coverage is usually for a specified period of years. The insurance company will pay your beneficiaries the death benefit of your policy only if you die during the term. Because it is "no frills" insurance, term insurance generally gives the largest immediate death benefit for the lowest premium dollar, particularly for adults under age 40. After age 40, premiums begin to rise sharply.

Permanent insurance combines a death benefit with cash value. Part of your premium is diverted into a cash value element. This cash value accumulation can help you avoid the need to pay higher premiums as you get older, as is often the case with term insurance. The specified period of coverage is usually up to age 95 or 100. You can cancel your coverage and redeem at least part of your accumulated cash value at any time. It may be possible to borrow or withdraw some of your cash value and still keep the policy in effect as long as the premiums are paid.

Types Of Term Insurance

Decreasing term insurance can be useful for insuring a declining debt such as a mortgage. The dollar amount of insurance protection decreases along with the level of needs while the premium generally stays the same.

Renewable term is a common variation of term insurance, the most popular being annual renewable term. With most renewable term policies, the coverage automatically renews at the end of each term, regardless of any changes in your health or occupation. At renewal, the premium rises, reflecting the increasing probability of your death, while the amount of coverage stays level. Many renewable term policies can be renewed until age 65 or 70; some until age 100.

While term policies rarely build cash values, most are guaranteed convertible to a permanent policy without a medical exam. When reading the details of a convertibility clause, look specifically for how long you have the option to convert, the type and quality of the permanent insurance, and if the conversion is at the same risk class.

Types Of Permanent Insurance

Whole life, often called "traditional whole life," is designed to cover your whole life. It has three, and sometimes four, basic elements: premium, death benefit, cash value and sometimes dividends.

From the day you buy the policy, you will pay a level premium based on your age at the time of purchase. A level premium is one that does not change once you buy the policy.

One advantage of whole life insurance is that it does not need to be renewed. As long as you pay your premium when it is due, you will have coverage for your entire life. If you live to the maturity date of your policy, (which is often age 95 or 100) most whole life policies will endow, that is, pay the face amount of the policy at maturity.

The growth in your cash value is guaranteed at a fixed rate and is also deferred for federal income tax purposes, meaning that you will not pay federal income taxes on the amount until you redeem it. You can borrow against the cash value at an interest rate specified in the policy, which could be lower than the current lending rates offered through banks. One important aspect of a loan against your cash value is that there is no specified repayment. You choose if and when to pay the loan in full. However, if you die before a policy loan is repaid, the insurer will subtract the outstanding loan, plus interest, from the death benefit.

Universal life insurance is very flexible, both in its premium payment schedule and its death benefit patterns.

With universal life, the insurance company credits your premium to your cash value minus administrative fees. The company then deducts the cost of your death benefit and expenses monthly. The death benefit expense is roughly equivalent to the cost of term coverage. The remainder of your premium is used to build your cash value, which accumulates with interest on a federal income tax-deferred basis.

The interest rate for your cash value is set periodically by the insurance company and is subject to a minimum rate, typically 3 percent to 4 percent. You can borrow against your cash value or make partial withdrawals without losing your coverage.

Variable universal life (VUL) is a variation on universal life. It is similar to universal life, with a major exception – with variable universal life, you select the investment vehicle that generates your cash value growth. You can usually invest in stocks, bonds, money market mutual funds or a combination of the three. Whatever rate your selected investments earn is the rate at which your cash value will accumulate federal income tax-deferred. So while you have the reward of potentially higher earnings accumulating federal income tax-deferred, you also assume greater risk.

If the stock market declines, so could your cash value, and you may have to make additional payments to keep your insurance in force. VUL is intended for those who are comfortable with the risks involved in tying together investment products, life insurance and tax-deferred cash value buildup.

A variable whole life policy is a variation of a whole life policy in which the premium is level, but the death benefit and the cash value fluctuate according to the investment performance of a separate account fund that you select.