When it comes to life insurance, there are numerous policies one can choose from—more than you may think. But having so many options can become confusing, right?
It doesn’t have to be difficult. By researching different policy options and finding the right insurance company, you may be able to purchase an insurance plan that suits your needs.
Here are some of the most common types of life insurances available:
Term Life Insurance
Term life insurance is one of the most popular and affordable policies. It is set for an agreed-upon period (for example, 10, 20 or 30 years) and once the time is up, you can either let the policy expire or renew it.
“Pure life insurance” is another name for a term policy because it is meant to cover the sudden loss of life. The company can pay out the value of the chosen policy if death occurs within the specified term. There are no additional components to it and no available cash value.
Within term life insurance there are three different types: level term (level-premium), yearly renewable term (YRT), and decreasing term.
The premiums for level term insurance do not change for the entire duration of the coverage. However, you may notice that premiums can be more expensive at the start of the period. Since premiums factor in your age (the older you are, the higher the premiums can be), this may offset the costs later in the coverage when you are older and the policy could be more expensive.
Yearly Renewable Term
True to its name, this type of policy has no set period of coverage and instead is renewed yearly. The premiums are set each year based on your current age, so premiums may increase slowly each time you renew the policy.
Decreasing term insurance is often used to cover a particular debt, say your mortgage or student loans. If sudden death occurs, the policy may pay out the specified debt for your family.
Permanent Life Insurance
The distinct difference between term and permanent life insurance is that permanent life insurance is meant to provide coverage for your entire life, not a set period. Although premiums may remain the same, they do tend to be more expensive than term policies as insurers may have a higher risk of having to pay out the policy.
Here are a few common types of permanent life insurance: whole, universal, variable, and universal variable insurance.
Traditional Whole Life Insurance
These types of policies can have a cash value portion of the plan that may acquire interest over time. Part of the paid premium goes towards the cash value side. The cash value continues to increase and is generally non-taxable.
Universal Life Insurance
This type allows you to change your premiums. Since part of the premium payments go towards the policy’s cash value, this can enable you to either increase or decrease how much goes in.
Variable Life Insurance
With variable policies, you can use the cash value as an investment. Whether it be in bonds, mutual funds, or another qualified asset, investing the cash value may give you a means to increase its total value. But like any investment, this carries the risk of a loss; however, the agreed-upon amount for your beneficiary is not affected.
Universal Variable Insurance
This policy is a hybrid of the other two types of whole life insurance. It allows you to change your premiums and invest your cash value. Some insurance companies may also allow you to adjust your death benefit. This type of policy has a lot of flexibility, but may also be the riskiest type.
As you can see, the variety of life insurance policies means there may be a type that’s right for you and your family. Talk with a financial professional1 and explore your life insurance options to find the best fit.
1 A life insurance agent cannot sell variable types of life insurance, nor can they give tax or investment advice. A securities license is necessary for the sale of variable life insurance products
Policy loans from life insurance policies generally are not subject to income tax, provided the contract is not a Modified Endowment Contract (MEC), as defined by Section 7702A of the Internal Revenue Code. A policy loan or withdrawal from a life insurance policy that is a MEC is taxable upon receipt to the extent cash value of the contract exceeds premium paid. Distributions from MECs are subject to federal income tax to the extent of the gain in the policy and taxable distributions are subject to a 10% additional tax prior to age 59½, with certain exceptions. Policy loans and withdrawals will reduce cash value and death benefit. Policy loans are subject to interest charges. Consult with and rely on your tax advisor or attorney on your specific situation.
Please consider the fund’s investment objectives, risks, charges and expenses carefully before investing. The product prospectus and the fund prospectuses contain this and other information about the funds and the variable products. To obtain current product and fund prospectuses, you can call or write to the life insurance company. Please read the prospectus carefully before you invest or send any money.
Life insurance policies have terms under which the policy may be continued in force or discontinued. Permanent life insurance requires monthly deductions to pay the policy’s charges and expenses, some of which will increase as the insured gets older. These deductions may reduce the cash value of the policy. Current cost of insurance rates and interest rates are not guaranteed. Therefore, the planned periodic premium may not be sufficient to carry the contract to maturity.
This material is for informational purposes only and should not be viewed as investment, tax, legal or other advice. Please consult with and rely on a qualified legal or tax advisor before entering into or paying additional premiums with respect to such arrangements.