Understanding Life Insurance

When thinking about life insurance, you should know there are two main types: term and permanent. A term life insurance policy pays if the insured dies during the “term” of the policy. Permanent life insurance, the type of policy that offers investment features, combines the death benefit coverage of a term policy with an investment component that can build cash value over time. Some permanent policies also include provisions for policyholders to access money immediately for any reason.

Permanent Life Insurance Options

Unlike term insurance, all permanent policies remain in place as long as the premium is paid. They also all have a cash value component that increases over time and allows the owner to borrow against that cash value. There are four types of permanent life insurance:

Whole Life Insurance

  • Offers a fixed premium for the duration of the policy, guaranteed annual cash value growth and a guaranteed death benefit.
  • Does not provide investment flexibility and, once established, you are not allowed to change the policy coverage.

Universal Life Insurance

  • Allows the policyholder to determine the amount and timing of premium payments (within certain limits) and to adjust coverage levels as needs change.
  • Includes guaranteed annual cash value growth but no investment flexibility.

Variable Life Insurance

  • Allows allocation of investment funds across stocks, bonds or money market accounts with different levels of risk and growth potential.
  • A minimum cash value is not guaranteed because of market fluctuation, and coverage amounts cannot be changed.
  • Exposes the policyholder to greater market risk, but has the potential for greater long term returns compared to whole or universal life insurance policies.

Variable Universal Life Insurance

  • Combination of variable and universal life insurance.
  • Offers the most flexibility (compared to other permanent life insurance options) with the ability to vary premium payments, investments and coverage amounts.
  • Allows investment in a variety of market products chosen by the policyholder, and may allow policyholders to make tax-free transfers among investments.
  • Exposes the policyholder to greater market risk than whole or universal life policies.

There is more to think about than the death benefit when selecting life insurance. If you choose permanent life insurance, be sure to consult a licensed investment or tax advisor for guidance on which policy best fits your risk tolerance and investment objectives.