Exploring Your Life Insurance Options

Two of the most important criteria for evaluating life insurance options are choosing between term and permanent insurance and understanding the factors  that affect the cost of the policy. Term insurance is temporary while permanent insurance lasts for the life of the insured. With factors such as age, sex and the health of the insured being equal, a term policy will generally be less expensive than a permanent policy.

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Life Insurance Options: Term Life Insurance

A term life insurance policy is in force for the length of the term only. While  the length of the term can vary among insurance companies, term insurance ends at a specified time in the future. Policies can be written for as few as five or as long as 30 years, depending on the age of the applicant. Most insurance companies do not issue a term policy after the age of 75, so a 65-year-old would most likely only be able to obtain a 10-year term policy.

Unlike permanent insurance, which has an investment component as well as a life insurance component, term life insurance does not contain a separate account that grows over time. The premiums that are paid for a term policy cover only the cost of the insuring the policyholder.Term life insurance can be purchased with an annual renewable term or with a level term. An annual renewable term policy is renewable every year. A level term policy is in place for a defined number of years.

Because term life insurance is inexpensive, it is usually best for young families who  may not have a large amount of extra money each month. For these families, a term life policy that provides a death benefit large enough to cover day-to-day and final expenses should be sufficient.

Life Insurance Options: Whole Life Insurance

Whole life insurance is one type of permanent insurance. A whole life policy is in force for a person’s “whole” life, as long as the he or she pays the premiums as specified in the contract. Whole life insurance contains a cash-building component that grows tax-deferred. Because it is part insurance and part investment product, part of the premium goes toward the cost of insuring the policyholder and part goes toward the investment. The premiums for a whole life insurance policy are often higher than the premiums for a term policy. But, whole life insurance can actually be more cost effective than term insurance as a person gets older.

There are a number of options from which to choose when selecting a whole life  policy. A participating policy will allow the policyholder to receive a  dividend paid by the insurance company based on its earnings. A level premium  policy will ensure that premiums remain level for the life of the insured. A single premium policy is bought with a single payment, making this type of policy popular for estate planning. This type of whole life policy also has  immediate equity against which the policyholder can borrow.

Life Insurance Options: Universal Life Insurance

Universal life insurance is also permanent insurance. Like all types of permanent insurance, a universal policy remains in effect provided premiums are paid when they are due. And, like all permanent policies, a portion of the premium is applied to the cost of insuring the policyholder and the other is credited to the investment portion. There are three main types of universal insurance: Fixed, variable and indexed. All three types involve market participation.

A fixed universal policy pays an interest rate that is fixed for the life of the policy. Whether interest rates rise or fall or the stock market goes up or down, the rate credited to the account remains the same. Some insurance companies will guarantee that the rate will not drop below a certain percentage, regardless of market conditions.

The interest paid on a variable universal policy will fluctuate based on market conditions. This type of policy works well when interest rates are higher. However, an investor can also lose a portion of his investment.An  indexed policy credits an amount that is tied to the gain of a market index,  such as the S&P 500.

One of the advantages to a universal life insurance policy is that the premium can be varied. Should a policyholder’s financial obligations or amount of income change drastically, he or she can reduce the premium and adjust the payment schedule. He or she can also choose to have the premiums paid through  deductions from the cash account portion of the policy.

Life Insurance Options: Variable Life Insurance

Both whole and universal life insurance policies can be set up as variable policies. A policy is variable if the cash portion of the account is invested at the direction of the policyholder. This is unlike traditional whole and universal policies. With traditional policies, the insurance company directs the investments.

Variable policyholders can usually choose among a number of different investment options. While options vary based on the insurance company, the owner of the policy can usually choose among funds that range from extremely conservative to extremely aggressive. He or she can usually also choose between foreign and domestic funds. Prior to purchasing a variable life insurance policy, an investor is advised to consider whether he or she needs the policy to function more as an insurance policy or an investment strategy. While the gains are credited to the account, losses are deducted, which could leave less for a  beneficiary.

Under most circumstances, a variable life insurance is usually not best suited for one who is risk-averse or whose dependents would more than likely experience a decreased standard of living if the death benefit is reduced due to market losses. Like all permanent life policies, a universal policy grows  tax-deferred. This can benefit younger investors who purchase the policy early in life and hang onto it. And, equity in the policy can be borrowed for any  purpose, such as the purchase of a home. The policy can also be used as collateral for a loan.

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