Different Life Insurance Benefits

Each of the two types of life insurance, term and permanent, has benefits that may be appropriate for those seeking to purchase life insurance. Term life insurance is affordable and straightforward. Permanent life insurance comes in three variations, all of which offer tax-deferred growth, the ability to borrow against equity and the possibility of substantial growth over time.

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Term Life Insurance Benefits

One of the benefits of term life insurance is that it is the most efficient type of insurance. The premium that is paid to the insurance company by the policyholder is used to cover the cost of paying the death benefit. A term policy is sometimes called a “one time benefit” policy because there is only one benefit: The death benefit that is paid to the beneficiary or beneficiaries upon the death of the policyholder.

Another term life insurance benefit is the flexibility of the term. Most insurance companies offer term insurance ranging from five years to 30 years. Young couples who want to make sure that mortgage payments can continue to be made upon the death of one spouse can choose a term that equals the length of the mortgage. Older parents can select a term that would be long enough to cover the college education costs of a child or grandchild. Still others can choose a term somewhere in-between that suits their individual needs.

Because it is usually the most affordable type of insurance, term life can also be used to supplement an existing policy. For example, a person who has life insurance benefits from an employer may choose a term policy in the event he or she is laid-off or terminated. A term life policy purchased directly from an insurance company can only be cancelled if the premiums are not paid.

Whole Life Insurance Benefits

One significant advantage of whole life insurance is that it is permanent insurance. It does not expire at the end of a term. Whole life, so named because it covers the policyholder for his or her “whole” life, remains in force until the policy matures. Policy maturity is considered to be the point at which the death benefit is paid. Whole life insurance shares the cash-building feature of all permanent life policies. A portion of the premium is used to cover the cost of the insurance. The remaining portion is applied to a cash account.

The cash account portion of the whole life insurance benefit can be invested in one of several ways. If the policyholder wants to share in the profits of the insurance company by receiving dividends, he or she can choose a Participating Whole Life Policy. While this is one of the most expensive types of a whole life insurance policy, the policyholder can reinvest the dividend or take it as cash.

Other types of whole life insurance benefits include Limited Payment, Single Premium and Intermediate Premium policies. These types of policies offer the ability to pay premiums for a limited amount of time, as one lump-sum payment or as adjustable payments. This premium payment flexibility is a great benefit for those who are either short on cash or for those who wish to purchase a whole life policy instead of an annuity.

Universal Life Insurance Benefits

Universal life is the newest type of permanent insurance. The return credited to the cash portion of the account may be less than that of a traditional whole life policy. However, most insurance companies will guarantee the amount paid each year, regardless of market conditions or profits. The insurance company invests a portion of the policyholder’s premium in its own investment accounts. For this reason, those seeking to purchase a universal life policy are always advised to make sure the insurance company they choose has the best possible credit ratings from A.M. Best, Fitch, Moody’s Investor Services and Standard and Poor’s.

Like a whole life policy, an investor who purchases a universal policy has the ability to vary the amount and schedule of the premium payments. This can be especially helpful during an unanticipated financial crisis such as the loss of a job. Further, policyholders can borrow against the equity in the policy or use it to pay the premiums.

The death benefit paid on a universal policy can also be set up to suit an individual’s unique needs. For example, a level death benefit will pay only the face value of the policy and none of the amount that has built up in the cash account. Because this type of universal policy pays less, the premiums are less expensive. A policy that pays an increasing benefit pays both the face amount and the value of the cash account. As would be expected, the premiums for an increasing benefit policy are more expensive.

Variable Life Insurance Benefits

The cash portion of a variable life policy is placed in investments as directed by the policyholder. Accounts that function very much like mutual funds are established for him or her. It’s important to know that his or her money is not commingled with that of the insurance company. The gains are solely that of the policyholder, as are the losses.

Variable insurance can be established as either whole life or universal life. The policyholder can choose among a number of investment vehicles in an effort to increase the cash portion of the policy. This can be a substantial benefit to high-income individuals who seek to save additional money for retirement. The returns earned on variable life insurance are tax-deferred.

Because of their favorable tax status, variable whole life policies can be purchased with after-tax dollars while the earnings compound over years, if not decades. In addition, the death benefit that is paid on this type of policy is almost always paid tax-free. This allows families to use the policy as an estate planning tool, as parents can pass otherwise taxable income to a child or children. Therefore, a variable life insurance policy functions both as an insurance product and as an investment product.

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