The different types of life insurance and their common uses.
There a two basic kinds of life insurance term and permanent.
Term coverage is for a specific amount of time, usually 5,10,15,20, or 30 years.
With term insurance there are different benefits depending on the company chosen.
With some life insurance companies, they offer the ability to convert term insurance to permanent insurance at any time before the end of the term.
Also, some life insurance companies offer the ability to accelerate the death benefit (ABR) at no additional coast, in the event of a terminal, chronic, critical illness or injury. There are companies that only have the terminal (ABR).
When the term insurance expires the policy premium will be much higher to re-new.
There is no cash accumulation in term life insurance.
The older a person gets, the amount of time someone can purchase may decrease at age 56.
Some of the common reasons for term insurance are;
- If there is a young family and the budget is very tight.
- If there is a start–up business less than six years old.
- To cover a mortgage.
- To replace a high income.
Permanent life insurance includes traditional whole life, universal life, variable universal life, and index universal life. Permanent means the life policy will last at least to age 99 or to age 120.
Most permanent life insurance policies have the ability to accrue cash value.
The traditional whole life policy has dividend options that accrue cash value. The universal life policy has the ability to accrue cash value based on a cap. Variable universal life has the ability to accrue cash value based on stock returns and losses in the market.
Index universal life has the ability to accrue cash value based on linking the returns of an index, usually the S&P 500 and has a zero floor so there are no losses if there is a down year for the index. There is also an option to have the death benefit be level where the cash value is separate from the death benefit or an increasing death benefit where the cash value is added to the death benefit.
There are different interest crediting strategies for the index universal life policies, some with caps and participation rates and some without a cap, not all index universal life insurance policies offer a no cap option. Some index universal life policies have a lifetime income benefit rider where a stream of income can be taken via policy loans for a tax-free source of income.
Only some permanent life insurance policies will have all the accelerated death benefit (ABR)`s options included.
Some of the common reasons for permanent insurance are;
- Use of the cash value tax free for college funding for children.
- Supplemental tax-free income for retirement.
- Use of the cash value without penalty and tax-free for any reason, such as capital for starting a business.
- To cover a mortgage.
- To replace a high income.
- For key employees.
- Employee retention.
- Tax strategies.
- Protecting wealth.
If you would like to know more about how to use life insurance in different ways or a review of your current policy contact me and schedule a meeting at no charge.