Life insurance offerings can be divided into two basic classes: temporary (term) and permanent (perm); and the following subclasses: term, universal, whole life and variable life. These are not all the types and classifications of life insurance out there, but these are the ones that are the most common.
Temporary or "Term" life insurance provides protection for a specified period of time only, like a term of 10, 20, or 30 years. Term life insurance is the probably the most affordable coverage because it doesn’t have any bells and whistles, but simply provides a death benefit. This is the type of insurance I original bought because the price stayed the same each year-during my designated term. However, after about a year into the policy, I got this letter stating that --oh by the way---at the end of my term, my premium was going to go up by eleven thousand dollars! ($11,000.00) Of course, I could choose another term or different policy before my term ran out. It was nice of them to give me plenty of warning, but I was still shocked at the price jump. The price, or premium, typically stays the same each year during the term. So the downside to term insurance is that once the term expires, the price to buy a new policy goes up as you get older.
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Permanent life insurance, on the other hand, provides a death benefit for your entire life and it can also be an investment. A portion of the premium you pay goes into an account called the policy’s “cash value”. This account value grows on a tax-deferred basis until you take a withdrawal or borrow from the policy. (Then you have to pay taxes on what you borrow)
The downside to permanent life insurance is that it can be expensive, and often comes with fees and commissions. These fees can reduce your annual return on the investment part of your policy when compared to what you could earn investing straight into the market.
The three most common types of permanent life insurance are:
o whole life
o universal life
o variable life
Whole Life Insurance (perm)
A whole life insurance policy gives you a guaranteed death benefit amount, a fixed annual premium, and a guaranteed rate of return on your cash value. Since the whole life policy comes with those important guarantees locked in, that means that whole life is the most expensive life insurance product available. To some, having those guarantees locked in, with no fear of fluctuation, is worth the extra expense.
Universal Life Insurance (perm)
Universal life doesn't offer the same guarantees as a whole life policy, but it does have more flexibility. Universal life premiums are cheaper, but they are not locked in and can increase up to a set maximum amount. This means that, with universal life, you get a minimum rate of return on your cash value (a floor), but your cash has a higher set ceiling. It can grow quicker because you can earn more when the financial markets go up- up to your set ceiling.
Variable Life Insurance (perm)
Variable life insurance is a lot like a universal policy, except you can choose how to invest your money from a menu of securities and funds. Variable life offers the most flexibility AND the most risk of all the permanent policies. Variable life policies have no guaranteed minimum rate of return (no floor). If the investments you choose perform well, then your cash value could skyrocket (no ceiling)....... but if not, your cash value could tank.
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Variable life insurance is a lot like a universal policy, except you can choose how to invest your money from a menu of securities and funds. Variable life offers the most flexibility AND the most risk of all the permanent policies. Variable life policies have no guaranteed minimum rate of return (no floor). If the investments you choose perform well, then your cash value could skyrocket (no ceiling)....... but if not, your cash value could tank.
