Many consumers are somewhat familiar with the basic idea of a life insurance policy but may be overwhelmed by their life insurance options. True, the world of life insurance can be confusing, with many different policy types and additional features. Plus, among carriers and contracts, there will be a great deal of variation. Finding the right insurance product for your specific financial needs involves careful evaluation and expert guidance.
If you support others—either through your efforts or income—a life insurance policy can provide protection in the event of your death. Consider how your family will cover necessary expenses in your absence.
Consider what financial legacy you want to leave your spouse, children, or other beneficiaries. With the expenses that a household has—such as a mortgage, car payments, utilities, or a college education—losing any financial support can place a financial strain on your family as they grieve your loss.
Life insurance protects your survivors and ensures that you are able to provide for your family, even in death.
While the primary need life insurance satisfies is obtaining a death benefit (as described above), modern life insurance has evolved to include many additional features, such as living benefits, accelerated death benefits, cash accumulation, and accessible cash value. This can make life insurance an important component of a retirement plan.
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Life insurance can be broken into two
main categories: term (temporary) and permanent.
Term Life Insurance
A term life insurance policy provides coverage for a set period of time, typically in 10-year increments. Term policies generally only offer a death benefit, without additional features like cash value accumulation. However, they are often the least expensive contracts on the market. Should you die during the period of coverage, benefits are issued to beneficiaries. Should you outlive the period, there is no retained value, but it may be possible to renew for another term, convert to a permanent policy, or receive some (or all) payments back with a return of premium feature.
Permanent Life Insurance
These types of life insurance policies are structured to provide coverage for an insured’s entire life, so long as conditions are met (i.e. premium targets and charges met). Permanent policies feature a cash value growth component within the contract, meaning that payments that rise over the pure cost of insurance accumulate at an established rate. The cash value may be accessed through withdrawals or loans.
Within the category of permanent life insurance, there are several variations.
Permanent Life Products
Whole Life Insurance
Whole Life Insurance provides a death benefit and accumulates cash value at a guaranteed, set rate. Dividends—or interest—grows in the cash value account tax-deferred. As a permanent policy, coverage extends for the insured’s entire life with a whole life insurance policy.
Universal Life Insurance
As long as premium targets are met, Universal Life Insurance gives policyholders flexible premium payment options, with an adjustable death benefit, on top of the cash value accumulation account.
Fixed Index Universal Life Insurance
The growth rate of an FIUL policy is tied the performance of a specific stock market index, such as the Dow Jones Industrial or Standard and Poors 500. While there is a relationship to an index performance, FIUL policies are not directly exposed to the stock market.
Guaranteed Universal Life Insurance
Even if cash value component is exhausted through loans or withdrawals, a guaranteed universal life insurance policy will issue benefits (provided premium targets are met).
Current Assumption Universal Life
In a current assumption universal life policy, premiums adjust based on a variety of factors, including current interest rates. Like other universal policies, a CAUL policy includes a cash value account.