Types of Life Insurance

When we decide to buy life insurance, we should first decide what types of life insurance. There are two basic types of life insurance: permanent and term.

What is permanent insurance?

Permanent (cash value) insurance provides lifelong protection as long as premiums are paid. It may build up cash value over time and the cash value grows tax deferred. With all permanent policies, the cash value is different from the face amount. Cash value is the amount available if you surrender (cancel) your policy before death. The face amount is the money that will be paid to your beneficiary if you die. Your beneficiary does not receive the cash value of your policy.

Cash value takes time to grow. But after you’ve held the policy for several years, its cash value can offer you several options:

• You can borrow from the insurer using your cash value as collateral. You can get the loan even if you don’t have a good credit history. If you don’t repay the loan (including interest), it will reduce the amount paid to your beneficiaries after your death.
• You can use the cash value to pay your premiums or to buy more coverage.
• You can exchange the policy by using the cash value for an annuity that will provide income for life or a specified period.
• You can cancel (surrender) the policy and receive the cash value in a lump sum. You would pay taxes on the value that exceeds what you’ve paid in premiums.

Basic types of cash value insurance

• Whole life (ordinary life) is the most traditional type of cash value insurance. Generally premiums and death benefits stay the same over the life of the policy. The policy’s cash value grows at a fixed rate.
• Variable life With a variable life policy you can choose among a variety of investments offering different risks and rewards—stocks, bonds, combination accounts, or options that guarantee principal and interest. Death benefits and cash value will vary depending on the performance of the investments you select. By law, you’ll be given a prospectus for variable life insurance. This prospectus will include financial statements and outline investment objectives, operating expenses, and risks. The cash value of a variable life policy is not guaranteed. If the market doesn’t perform well, the cash value and death benefit may decrease, although some policies guarantee that the death benefit won’t fall below a certain level.
• Universal life gives you fexibility in setting premium payments and the death beneft. Changes must be made within certain guidelines set by the policy; to increase a death beneft, the insurer usually requires evidence of continued good health. A universal life policy can have a variable component.