Life insurance is provided to meet the needs of survivors at the insured’s death. There are various types of life insurance but all have similar attributes.

Life insurance policies may build up cash value that can be utilized for a variety of purposes. A particular policy may be intended primarily for protection through its death benefit, or it may be designed more for investment purposes through increasing cash value.

When life insurance is used for protection at death, the life insurance company pays an amount specified in the policy to the beneficiaries. If you are named a beneficiary, you receive the insurance amount free of income tax. Some types of insurance have cash benefits available while you are living. With these types, a portion of your premium goes into a cash reserve and builds on a tax-deferred basis. People use life insurance in this way to fund many different things such as the cost of education or enhanced retirement cash flow.

Term Life Insurance:

Term life insurance is life insurance which guarantees your premium for a specific period of time. Most term insurance is offered in terms that provide level premiums for 5, 10, 20, and 30 year periods. After that period, the premium will increase for the next term at renewal. Many term policies are renewable to age 80 or 85, depending on the insurance company. Most term policies also allow for a conversion privilege to the insured up until a certain age; usually 70 or 75, allowing them to convert to any permanent life insurance policy offered by the life insurance company. This allows the insured to convert without evidence of insurability, with rates based on age at the time of conversion.

If the insured dies during the term, the death benefit will be paid to the beneficiary. Term insurance is often the most inexpensive way to purchase a substantial death benefit on a coverage amount per premium dollar basis. It is well suited for short-range goals such as life insurance coverage to pay off a loan, or providing extra life insurance protection for families with children.
Term life insurance is the original form of life insurance and is considered to be pure insurance protection because it builds no cash value.

Permanent Life Insurance:

Whole Life is a type of permanent life insurance that provides coverage for as long as you live and continue to make timely premium payments. With level premiums and the accumulation of cash values, whole life insurance is a good choice for long-range goals. The guaranteed cash values can provide money later on to help with temporary needs, emergencies or used to offset future premiums.

There are many advantages to choosing a whole life policy. Because whole life offers level premiums for life, the younger you are when you purchase whole life, the less your premiums will be later. You are essentially paying more now to pay less in the future. Also, many whole life policies pay dividends. This occurs when the actual life insurance costs turn out to be less than what the assumed cost was when the premium was set. When this happens, the insurance company may return a portion of your life insurance premium to you as a dividend. However, these dividends are never guaranteed, since the actual costs and claims experience are not known in advance.

Unlike term life insurance, with Whole life policies some of the premiums that are paid into the policy accumulate as guaranteed cash values. When the policy is surrendered, these guaranteed cash values are available for withdrawal. However, as long as the policy is in force, the policyholder may borrow against them as a policy loan at the current policy loan interest rate. However, borrowed amounts reduce the death benefit and cash surrender value.

The amount of the guaranteed cash value depends on size and time horizon of the whole life policy. Most growth in cash values is tax deferred under current federal income tax law.

Universal Life is very similar to whole life but differs in that the insurance and investment component is clearly separated. It is essentially a term plan with a side fund. The side fund can be invested in guaranteed investments, savings deposits or segregated style funds, whose returns can fluctuate. It also offers a flexible premium and has an adjustable benefit. Universal life offers the feature of growth on a tax deferred basis. The cost of insurance can be guaranteed for life, yearly renewable term, 10 year term, 20 year term, etc. The flexibility of this policy allows one to change the amount of insurance they hold, as their needs change. Universal life is often a good choice for families who may have fluctuations in their income. If a Universal Life plan is not properly funded, future premiums may rise significantly.

Another type of permanent insurance is Term to age 100 (or simply T100).  Most T100 policies have guaranteed premiums for life similar to a whole life policy, but because there is no savings element or side funds the premiums are usually lower. If the death benefit has not yet been paid by the insured’s age 100, it will be paid at that time.

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