Term, Whole, Variable, Universal and Annuity Products
Buying life insurance might be one of the most important decisions you make in your lifetime. As you consider your options and which coverage option is right for you, consider the following: Where are you in life? What’s going on with you and your family now? What are your long-term financial security goals? Answers to these questions and several other factors will definitely help to determine the choice that’s right for you. Explore the different types of life insurance such as term, whole, universal, and variable and get the best life insurance rates from top-rated life insurance companies.
Do I need Life Insurance?
If you have anyone that depends upon you financially, whether it be a wife and children, siblings, parents, or anyone else for that matter, you need life insurance. If you were to die suddenly, how would your loved ones cover your final expenses and the ongoing expenses required to maintain their standard of living? Without your income, they would be in serious trouble. That’s where life insurance comes into play.
What are the different types?
There are many different forms of life insurance but they all fall into two main categories: term insurance and permanent insurance.
Term Life Insurance
Term insurance is the most affordable type of insurance initially and is designed to meet temporary needs—anywhere from one year to as much as 30 years or even to a specified age. The idea here is that you define a specific time period within which you feel you’ll have people depending on your income and when you reach a point when that’s no longer the case, like when your children finally graduate from college or your mortgage is finally paid off, your insurance coverage ends. Term insurance generally only pays if you die during the term of the policy. Unlike forms of permanent insurance, there is no savings element or cash value option with term insurance.
Permanent Life Insurance
Permanent insurance is intended to provide lifelong protection. As long as the premiums are paid, and no loans or withdrawals are taken against its value, the full face amount will be paid. Because it’s designed to last a lifetime, this category of insurance products accumulate cash value and is priced to keep long term. This category of life insurance includes:
Whole Life Insurance
With Whole Life, or Ordinary Life as this product is also known,you’ll have a guaranteed death benefit, a level premium that’s guaranteed to never increase, and a certified rate of return on your cash values.
Also, with a participating Whole Life policy is the ability to earn dividends from the issuing company if they perform well. As a policyholder, you may realize dividends, after the second policy year. If you choose to leave those dividends in the policy, you can enhance your death benefit and cash value growth, offsetting any negative effects that inflation would have on your coverage.
Variable Life Insurance
Variable Life insurance provides you with the death benefits and cash values that differ based on the performance of an investment portfolio. With this product, you assign your premiums among various investment options—each with varying levels of potential exposure and possible reward. Options include: stocks, bonds, some combination of both stocks and bonds, or a fixed account that assures interest and principal. This product is for someone willing to assume investment risk to obtain higher gains. Good performance will result in a larger death benefit and higher cash values while poor performance will result in drops in death benefits and cash values.
Universal Life Insurance
Universal Life treats each of the components of the policy separately; this product enables you to change or skip premium payments or change death benefit amounts easier than with other policies. Cash values are accumulated by crediting premiums and interest to a fund from which deductions are made for administrative expenses and cost of insurance. With most Universal Life products, you have a confirmed rate of return on the cash value, with one exception. You may not acquire any cash value at all if any one of the following circumstances occurs: fund management expenses increase, mortality assumptions change, the insurance company’s investments underperform, or premium payments are inadequate.
Variable Universal Life Insurance
Variable Universal Life allows you to assign premium dollars to various investment options, each with differing levels of risk. These policies are ideal for those seeking maximum flexibility. As your needs change, you have the option of increasing or decreasing your coverage amount. You have the option of submitting large “lump sum” payments to increase your policy’s cash value. If you find yourself with low cash on hand you have the option of skipping a scheduled payment and let accrued cash value cover policy expenses.
How much life insurance do I need?
The answer to this question is difficult because it varies based on your circumstances and objectives. While everyone is different if you stop for a moment and ask yourself a couple of very straightforward questions you should be able to get an idea of how much you’ll need.
- How much money will my family need to cover immediate expenses (debts, funeral expenses, etc.)?
- How much money will my family need to maintain their standard of living?
The best way to determine how much coverage you’ll need is to conduct what known as a Capital Needs Analysis. In short here’s what to consider and the formula to apply to arrive at the coverage amount you’d need to meet your family’s needs in the near term and going forward.
Take the current and future financial obligations and subtract that number from any existing financial resources (survivors’ earnings, savings, investments, etc.) that are known. The difference between the two is the amount of life insurance that is needed.
What about Annuities? What are they?
Another set of products offered by insurance companies are called annuities. Unlike life insurance products where payment is made at the time of death of the insured, an annuity can provide an income for as long as you live. The two types are immediate annuity and deferred annuity.
Immediate Annuity: is when you make a large payment to an insurance company and they pay it out to you in scheduled installments.
Deferred Annuity: is more common, where money paid by you accumulates with interest over time. You may choose to have the accrued cash be paid back in scheduled installments.
Both types offer choices for receiving your income. It is usually monthly but the most standard choices are:
Life Annuity: you are paid an income for as long as you live.
Period Certain Annuity: you receive payments for a specified time period. (Five years, 10 years or 20 years, for example.)
Life Annuity with Period Certain: payments are made to you for as long as you live but if you die prior to the time period you choose, a portion of the established income (e.g., 50% or 75%) will be paid to a designated survivor over that person’s life.