Term Life Insurance
What are the different types of term life insurance policies?
Term insurance comes in two basic varieties—level term and decreasing term. These days, almost everyone buys level term insurance. The terms “level” and “decreasing” refer to the death benefit amount during the term of the policy. A level term policy pays the same benefit amount if death occurs at any point during the term.
- Yearly- (or annually-) renewable term
- 5-year renewable term
- 10-year term
- 15-year term
- 20-year term
- 25-year term
- 30-year term
- Term to a specified age (usually 65)
Yearly renewable term, once popular, is no longer a top seller. The most popular type is now 20-year term. Most companies will not sell term insurance to an applicant for a term that ends past his or her 80th birthday.
If a policy is “renewable,” that means it continues in force for an additional term or terms, up to a specified age, even if the health of the insured (or other factors) would cause him or her to be rejected if he or she applied for a new life insurance policy.
Generally, the premium for the policy is based on the insured person’s age and health at the policy’s start, and the premium remains the same (level) for the length of the term. So, premiums for 5-year renewable term can be level for 5 years, then to a new rate reflecting the new age of the insured, and so on every five years. Some longer term policies will guarantee that the premium will not increase during the term; others don’t make that guarantee, enabling the insurance company to raise the rate during the policy’s term.
Some term policies are convertible. This means that the policy’s owner has the right to change it into a permanent type of life insurance without additional evidence of insurability.
In most types of term insurance, including homeowners and auto insurance, if you haven’t had a claim under the policy by the time it expires, you get no refund of the premium. Your premium bought the protection that you had but didn’t need, and you’ve received fair value. Some term life insurance consumers have been unhappy at this outcome, so some insurers have created term life with a “return of premium” feature. The premiums for the insurance with this feature are often significantly higher than for policies without it, and they generally require that you keep the policy in force to its term or else you forfeit the return of premium benefit. Some policies will return the base premium but not the extra premium (for the return benefit), and others will return both.
Whole Life Insurance
What Is Whole Life Insurance?
Whole life insurance is a type of permanent life insurance, which means the insured person is covered for the duration of their life as long as premiums are paid on time. Permanent life insurance is different than term life insurance, which covers the insured person for a set amount of time (usually between 10 and 30 years).
Whole life insurance is the most common type of permanent life insurance policy that people purchase, according to the Insurance Information Institute (III).
Like most permanent life insurance policies, whole life also offers a savings component called “cash value.” Read on to learn more about the benefits of whole life insurance.
WHAT ARE THE BENEFITS OF WHOLE LIFE INSURANCE?
Certain aspects of whole life insurance can make it an appealing choice.
- Your premiums are fixed and will never go up, regardless of market conditions.
- You may be able to withdraw funds or take out a loan.
- Your death benefit is guaranteed as long as you make the required premium payments.
WHOLE LIFE INSURANCE PROVIDES FIXED PREMIUMS AND FIXED DEATH BENEFIT
In most cases, the premium and death benefit stay constant for the duration of a whole life insurance policy, says the III. A universal life insurance policy, on the other hand, may offer the option to adjust your premiums or death benefit over time.
Because whole life insurance gives you fixed premiums and a fixed death benefit, you won’t have to worry about increased premiums as you get older. And, your loved ones will also know how much to expect when your life insurance benefit is paid out after you pass away.
WHOLE LIFE BUILDS CASH VALUE
A whole life policy can serve as a source of emergency funds for you if something goes wrong, or you may be able to take out a loan against the policy. That’s because a portion of each premium payment you make is funneled into a savings component of the policy called the “cash value.”
Over time, the cash value of your policy increases, and you may have the option to withdraw funds or borrow against it. The rules on how and when you can do this vary by company and policy. Your insurer may also offer guidelines to follow so that you don’t inadvertently reduce the policy’s death benefit or create a tax burden.
HOW MUCH DOES WHOLE LIFE INSURANCE COST?
The cost of a whole life insurance policy depends on several factors, including how much coverage you buy and other things.
When it comes to paying your premiums, you’ll typically be able to make a fixed annual payment for a whole life insurance policy. Some life insurance companies may also offer the option to pay monthly, quarterly or twice a year. Be aware, however, that paying premiums more frequently than once per year may incur additional fees.
ARE WHOLE LIFE INSURANCE PREMIUMS TAX DEDUCTIBLE?
According to the Internal Revenue Service, you cannot deduct premiums you paid for a whole life insurance policy on your tax return.
However, if your beneficiaries receive the death benefit from your policy, they likely would not have to pay federal income taxes on that benefit. However, any interest earned on top of the death benefit will likely be considered taxable income.
WHO SHOULD CONSIDER WHOLE LIFE INSURANCE?
So, when might a whole life policy make sense for you? Life Happens says a whole life insurance policy might be a fit for someone who likes predictability over time. This is because whole life insurance offers death benefit guarantees and fixed premiums.
If you’re considering a whole life insurance policy, it may be a good idea to talk it over with a local agent. They can help you review the different options before you make any decisions. That way, you can be confident you’ve chosen the life insurance policy that works best for you and your family.
Indexed Universal Life Insurance
What Is Indexed Universal Life Insurance?
Indexed universal life insurance is a type of permanent life insurance, which means it has a cash value component in addition to a death benefit. The money in your cash value account can earn interest based on a stock market index chosen by your insurer, such as the S&P 500 or the Nasdaq Composite. Funds don’t earn a fixed rate of interest but typically come with an interest rate guarantee.
KEY FEATURES OF INDEXED UNIVERSAL LIFE INSURANCE
No fixed interest rate: When you purchase indexed universal life insurance, funds in your cash value indexed account don’t earn a fixed rate of interest, the National Association of Insurance Commissioners (NAIC) explains. Instead, your rate of interest is based on a market index chosen by your insurer. (This differs from a universal life insurance policy, which the Insurance Information Institute (III) says earns interest similar to that of a money market account.) According to the Securities and Exchange Commission, an index tracks the performance of the specific basket of investments, such as stocks or bonds. Your insurer selects the index, and then calculates an interest rate based on the performance of the index, says the NAIC. The life insurance company then credits that interest to your cash value account.
Interest rate guarantee: The NAIC also says that policies typically include an interest rate guarantee, so a minimum interest rate is paid even if the index produces lower returns. However, interest rates are usually also subject to a “cap” or upper limit.
There are several other features of indexed universal life insurance, according to the American Institute of Certified Public Accountants (AICPA):
Adjustable premium payments (within limits): Your policy will likely specify a planned premium for you. However, if you have enough money in your cash value account, you may be able to use those funds to help pay your premiums.
Adjustable death benefit: Death benefits are typically flexible with an indexed universal life policy, and you can usually lower them at any time. However, increasing the death benefit may require you to pass a medical examination.
Access to cash value: In case of emergency, you may be able to borrow from your indexed universal life insurance policy, although you will likely be charged interest for doing so. You may also be able to make withdrawals from your cash value account. However, doing so may permanently reduce your death benefit. If you don’t maintain a large enough balance in your cash value account, withdrawals may also risk causing your policy to lapse.
WHO MIGHT CHOOSE INDEXED UNIVERSAL LIFE INSURANCE?
The III suggests that permanent life insurance may be a good option if you want lifelong life insurance and want to build your cash account over the long term.
The NAIC points to the fact that indexed universal life insurance offers both potential for growth based on the market, as well as protection from losing value if the market falls. If these features appeal to you, you might consider indexed universal life insurance. An insurance agent can help you make an informed decision about whether indexed universal life insurance is right for you.
Request A Quote
Phone (760) 568-9090