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Life Insurance: Term, Whole life, Universal
There are several different kinds of life insurance out there, but many people don't realize that each type of life insurance is designed to fill different needs. Too often people who want life insurance just want the cheapest rate and don't realize that the insurance isn't filling their need. This article will go over a few types of life insurance and what they should be used for. But first there are some words that you should understand if you are going to look at life insurance
Face amount – The amount the policy will pay in the event of the death of the covered person (also called death benefit)
Premium – The amount the owner of the policy is responsible to pay.
Beneficiary – The person who the face amount is paid too.
Cash Value – When the person covered by the policy dies the beneficiary gets the face amount and the insurance company keeps the cash value. While the person is still alive, its the amount you can borrow from your insurance policy. Only some life insurance policies build cash values. Please note, that if you borrow against your policy and do not pay it back then the amount borrowed will be deducted from the face amount when its paid out.
Term Life Insurance
Term insurance is the most heard of insurance because it is flashed all over TV and always has the lowest rate. Term life insurance is life insurance for a specific period of time most commonly 10, 20 or 30 years. The reason term life insurance is so cheap is because its a roll of the dice, meaning, if you die during the period the insurance is in force, your beneficiary gets the face amount. But if you don't die then the insurance company keeps all the premium you paid. Insurance companies profit greatly from term life insurance because only about 3% of term policies end up being paid out. It is important to note that term policies do not build cash values.
That being said, term life insurance does have a proper use. It is great for people who have a large debt such as a house. For example, a couple buys a house for $500,000 and gets a 30 year mortgage. A 30 year term policy for $500,000 on the bread winner would be a great idea encase that person dies before the mortgage is paid off. That way the spouse could pay off the house and continue to live there. And if the bread winner doesn't die before the mortgage is paid off then the term policy ends and they no longer pay it.
Whole Life Insurance
Whole life insurance is the most expensive kind of life insurance, it is mainly used by people who want to invest money into the policy and build the cash value. Whole life policies do not have a specific term they are designed to cover you until you die and last I checked the death ratio was still 100%, so as long as the premium is paid it will always pay out. Whole life policies do build cash values naturally from the premium alone but you may also invest more money into the policy to build the cash value faster.
This type of policy is for a person that wants a permanent policy that will pay something to the beneficiary, but also wants to use it to build money for something else. For example, a 30 year old man buys a whole life policy for $100,000 which costs him $100 a month in premium. He decides to pay extra into the policy so that when he retires at 65 the cash value is $500,000. This means when he retires he can take out $400,000 and still be left with $100,000 to go to his beneficiary when he dies.
The last thing to know about whole life insurance is how the cash value is invested. You can choose from fixed or variable, meaning you can choose to get a low fixed rate of interest or choose the variable interest which is effected by the market and can be higher or lower than the fixed depending on how the economy is doing.
Universal Life Insurance
Universal life insurance is also a policy that covers you for your entire life but unlike the whole life policy it is not designed to grow the cash value. As a result the premium payments are lower than a whole life policy. This type of policy is for a person that just wants a permanent policy to pay something to the beneficiary when he or she dies. Its the simplest form of permanent life insurance, its not designed for you to borrow against it or invest in it. Its just for the person who wants to leave some money to their beneficiary no bells or whistles.
Its important to know the reason you are getting life insurance before you go looking and start shopping by price alone. Really sit and think what you want your life insurance to do so that you don't end up with a product that doesn't suit your needs. This is an important decision and can effect the future of yourself and your loved ones, even the next generation of your family.