Whether by a diligent insurance agent, concerned spouse or family member, chances are you have been asked this question: “Do you have life insurance?”
For some, life insurance is easily obtained on a group plan as a workplace benefit. Those without this option must purchase life insurance individually on an open market. The life insurance marketplace is highly competitive and there are many products available for purchase. While the vast selection is a good thing for buyers, it can contribute to anxiety for those not sure which type of life insurance is best for them.
If you are shopping for life insurance for your family and are overwhelmed by all of the choices, the following brief descriptions of some of the more common options may be helpful.
Term Life. Term life is the most common type of life insurance policy. This type of insurance is simple: you pay a premium based on the number of years the policy will be in effect, such as 10 or 30 years. If you die before the specified age, a pre-determined sum of money called the “death benefit” will go to your beneficiary who can use it for a variety of reasons, including the cost of final expenses or to replace your lost income.
The death benefit is the sole function of a term life policy; it does not accumulate cash value. Term life provides the best opportunity for many individuals who are looking at life insurance for the death benefit rather than as an investment.
Cash Value. A cash value policy provides the opportunity to purchase term insurance in combination with a savings or investment account that can collect interest, be used for loans and other functions. Some options allow the policyholder a greater degree of control of the cash value. A cash value policy is an attractive option for someone who understands the importance of the death benefit but appreciates the opportunity to grow the policy’s value over time.
Whole Life. A primary function of this form of life insurance includes a low-risk cash value account that accumulates on a tax-deferred basis. The cost of the insurance is fixed and does not change, provided the premium is paid. The policy also allows the policy owner to withdraw funds from the cash value, although the death benefit is reduced if that is done.
Variable Life. A primary function of this form of life insurance includes a risk-basis cash value account that accumulates on a tax-deferred basis. You have the option to borrow from the policy. The death benefit could change depending on the level of returns produced by the cash value account.
Universal Life. A primary function of this form of life insurance includes a low-risk cash value account that accumulates on a tax-deferred basis. The cash value account earns current market rates of interest. The policyholder has the ability to borrow or withdraw from the policy. There is greater flexibility in the premium.
Universal Variable Life. This type of life insurance offers the policyholder greater flexibility and more options. For example, cash value options are tax-deferred. Separate accounts are available for investments the policyholder is interested in, such as stocks, bond funds, and other opportunities. The policyholder can withdraw or borrow against the policy. The fact that it is tied to securities gives this type of policy a greater opportunity to grow. Conversely, it may not be ideal for someone searching for a more low-risk conservative product.
Which is right for your family?
Does the opportunity to accumulate and utilize cash value over time interest you? If so, you can see that there are many options that allow you to do this. Some are low-risk; others have a greater risk-reward factor.
If you choose to separate investments and savings from life insurance, and if your primary concern is to provide a death benefit, then a term life policy is right for you. This is “pure insurance”—full coverage if death occurs before the designated term, no coverage if death occurs after. It’s simple but runs the risk of paying nothing if you out-live the term.
Too many options can create anxiety that could drive you away from purchasing life insurance. But consider that, while the number of choices can be daunting, life insurance is much too important to ignore. The good news is that you don’t have to go about the decision alone.