Life Insurance – Protect Your Family
Simply put, life insurance is vitally important to have in a financial plan. Insurance protects you and your beneficiaries when you die. There are two divisions of life insurance, temporary and permanent. While term, universal, whole life, and endowment life insurance are the different types of insurances. Term insurance is life insurance coverage for a specified time period. The policy does not accumulate a cash value. Term is usually considered to be just pure insurance. The premium only buys protection just in the event of death. There are three aspects to be considered with term insurance, the amount, the premium cost, and the length of the coverage. Annual renewable term is a one-year policy. A young person most likely will have cheap premiums for annual renewable term insurance. However, as you get older, the premiums increase. Level premium term insurance has higher, but fixed premiums for longer periods. Level premium term insurance can be bought in minimum 5 year terms up to 35 year terms. The premium does not change over the years.
Whole life, universal, limited pay, and endowment are the four types of permanent life insurance. Permanent life insurance is life insurance that remains active until the policy matures. The owner can access the money in the cash value by withdrawing money, borrowing the cash value, or surrendering the policy and receiving the surrender value. Whole life insurance offers lifetime death benefit coverage for a level premium. Whole life premiums are generally higher than term insurance at younger ages. However, when term insurance premiums increase with age at each renewal, the cumulative value of all premiums paid across the time frame are roughly equal if policies are kept until average life expectancy. As previously stated, part of the insurance contract requires that the policyholder is entitled to a cash value reserve. The cash value is received through policy loans that can be accessed at any time. They are also income tax free. Policy loans are available to be used until the insured’s death. If there are any unpaid loans at the time of death, the insurer subtracts the loan amount from the death benefit and the beneficiary receives the rest of the policy. There are a number of advantages of whole life insurance. These advantages are guaranteed death benefits, guaranteed cash values, fixed, predictable annual premiums, and mortality and expense charges that will not reduce the cash value of the policy. However, there are some disadvantages. The disadvantages are inflexibility of premiums and the internal rate of return in the policy might not be competitive with other savings options. The death benefit can be increased through the use of policy dividends. However, these dividends cannot be guaranteed and could be higher or lower than previous rates.
Universal life is another type of permanent insurance. This type of life insurance combines term insurance with a money market-type investment that pays a market rate of return. Therefore, to get a higher return, these policies usually do not guarantee a certain rate. Universal life insurance addresses the disadvantages of whole life that the premiums and death benefit are fixed. Universal life offers flexibility with the premiums and death benefit.
Limited pay life insurance is a type of insurance where the premiums are paid over a specified time period and no additional premiums are due to in force the policy. Generally, limited pay periods are 10-year, 20-year, and are paid out at the age of 65.
Endowments are policies that the cumulative cash value of the policy equals the death benefit at a certain age. The age at which this happens is known as the endowment age. Endowments are significantly more expensive, with the respect to the terms of annual premiums, than either whole life or universal life insurance because the time period to pay premiums is shortened and the endowment date is earlier.