What is the Right Kind of Life Insurance Policy for You?
There are two basic types of life insurance: term insurance and cash value insurance.
- Covers you for a term of one or more years and only pays a death benefit if you die during that term.
- May have lower premiums initially and offers the largest insurance protection for your premium dollar.
- Generally does not build up cash value.
- Can usually be renewed for one or more terms even if your health has changed, though each time you renew, premiums may be higher.
At the time of purchase, ask what the premiums will be if you continue to renew the policy. Also ask if you will lose the right to renew the policy at some age. For a higher premium, some companies will give you the right to keep the policy in force for a guaranteed period at the same price each year. At the end of that time you may need to pass a physical examination to continue coverage, and premiums may increase.
You may be able to trade a term insurance policy for a cash value policy during a conversion period—even if you are not in good health. Premiums for the new policy will be higher.
Cash Value Life Insurance:
- Is a type of insurance where the premiums charged are higher at the beginning than they would be for the same amount of term insurance.
- Uses the excess premium to invest and build cash value that you may use to:
- Take out a loan (the amount you owe will be subtracted from any benefits paid)
- Keep coverage for a limited time or at a reduced amount without having to pay more premiums;
- Draw on in retirement or assist with certain expenses, such as a child’s tuition or unexpected medical bills, without canceling the policy.
Cash value life insurance may be one of the following types:
- Whole Life provides protection for as long as you live if your premiums are paid. Premiums are usually a fixed amount. When compared to the same amount of coverage offered with term insurance, premiums can initially seem much higher, but over time whole life premiums will be smaller compared with what you would eventually pay to keep renewing a term policy. Some whole life policies let you pay for a set period, such as 20 years, or until age 65, but the premiums will be higher.
- Universal Life (also known as Flexible Premium or Adjustable Life) is term insurance that allows for a cash component. These policies let you vary your premium payments. On some policies, you can adjust the face amount of your coverage. Increases may require proof that you qualify for the new death benefit. The premiums you pay (less expense charges) go into an account that earns interest. Charges are deducted from the account. If your yearly premium payment plus the interest your account earns is less than the charges, your account value will be lowered. If the balance continues to drop your coverage will eventually end. To prevent that, you may need to make or increase your premium payments, or your death benefit.
- Variable Life cash values and death benefits depend on the investment performance of one or more separate investment accounts that are allowed under the policy. Be sure to read the prospectus from the company when buying this kind of policy. You will have higher benefits and cash value if the underlying investments do well, or they will be lower or disappear if the investments you choose don’t do as well as you expected. You may pay an extra premium for a guaranteed death benefit.