Life Insurance Basics

Selecting the right type of life insurance can be a daunting task because there are so many different policies available to consumers. The most appropriate type of life insurance policy for individuals will depend greatly upon their ages and family status. One common misconception dating back to the days when women typically were not in the workforce as they are today is that women do not need life insurance. Working women of all ages should carry life insurance to protect their families or as an investment for their future.

Term Life Insurance

Term life insurance is perhaps the easiest to understand because it functions somewhat like home or auto insurance. With term life insurance, individuals pay premiums and the named beneficiaries collect the face value of the policies if the insured individual dies during the term. For example, with a 20-year term life insurance policy for a face value (amount of insurance) of $100,000, the owner pays regular premiums and the beneficiaries receive $100,000 should the owner die while the policy is still in force (active).

Term life insurance is typically inexpensive and is an excellent choice for young families because it is affordable. Term life insurance can provide much needed cash should one or both parents die. One thing to remember is that term insurance becomes more expensive as you get older. So, renewing a term policy at some point may become cost prohibitive.

Whole Life Insurance

Whole life insurance policies pay a death benefit just like term life insurance; however, whole life insurance also accumulates cash value. Cash value is similar to interest earned on a savings account. While whole life insurance typically has higher premiums than term insurance, owners of whole life policies are building some savings into their financial plan.

Whole life insurance is just that; unlike term insurance which covers a fixed period of time, an owner can keep a whole life policy for an entire lifetime. A whole life policy is one way to leave financial assets to beneficiaries.

With a whole life policy, the cash value accumulating inside the policy is the company’s hedge against a higher mortality expense as you age. This is why the company will continue coverage until your death without increasing renewal costs during your lifetime. In a whole life policy, the cash value earns a guaranteed rate of return.

Universal Life Insurance

Like whole life, a universal life insurance policy pays a death benefit. It also accumulates cash value and tax deferral on the build-up of the cash value. And, like whole life, the insurance companies allow owners to borrow against the cash value of a universal life policy. One big difference is that the interest rate applied to the cash value account is not guaranteed by the company. It is based on market conditions and that risk is borne by the policy owner. If the policy underperforms it is possible that premiums could be increased in order to keep the policy in force.

Larry Parman
Attorney at Law