Life Insurance

Term life insurance covers the insured for a specific period of time (usually 5,10,15,20,25 or 30 years). All of the money from the premium is used to pay for the insurance itself. The policy does not accrue cash value for the insured. If the insured dies during the term of the policy, the policy pays off at its face value. Term life policies provide a tax-free death benefit.

Term insurance is based on Mortality Tables so the younger you are the cheaper the insurance coverage will be. Conversely, if the longer you wait to purchase term insurance the more the price will increase as you age. Health problems may show up over time which may cause a higher cost due to the chance that the insurance company will have to pay a settlement. A policy may also be convertible, which means that the insured can convert the policy to permanent life at a later time.

Another choice related to term life is the option for level or decreasing term. Level term pays the same amount of money upon death at any point during the policy. Decreasing term pays less and less as the term progresses. The latter is most effective for protection against a mortgage or any other steadily decreasing financial obligation. Level term life is not to be confused with level premium term life, which specifies that premiums will not increase over the course of the term in exchange for slightly higher premiums early in the term. Cash value insurance is an umbrella term for a variety of plans that combine a death benefit similar to a term life plan with tax-sheltered savings arrangements. Permanent life policies, as their name implies, are meant to be held and paid into for the duration of the insured's life.

The cash value portion of the policy is invested in a savings account. Accordingly, value accrues in the policy over time. This portion of the money paid by the insured was originally intended to pay insurance premiums in retirement. Because the account is an asset belonging to the policy holder, however, it is assignable, meaning that it can be transferred to another person or used as collateral for a loan. Policies may even be converted to an annuity to provide income during retirement. Any balance remaining in the account when a settlement is paid is passed on to the beneficiary of the policy. Removing money from the account before settlement for expenses other than the insurance premium is not recommended because taxes and fees will be incurred.

Whole life is the most basic form of cash value life insurance. The insurance company essentially makes all of the decisions regarding the policy. Regular premiums both pay insurance costs and cause equity to accrue in a savings account. A fixed death benefit is paid to the beneficiary along with the balance of the savings account. Premiums are fixed throughout the life of the policy even though the breakdown between insurance and savings swings toward the former over time. Management fees also eat up a portion of the premiums. The insurance company will invest your money primarily in fixed-income securities, meaning that your savings investment will be subject to interest rate and inflation risk.

Universal life was created to provide more flexibility than whole life by allowing the holder to shift money between the insurance and savings components of the policy. Additionally, the inner workings of the investment process are openly displayed to the holder. Details of whole life investments tend to be quite scarce. Premiums, which are variable, are broken down by the insurance company into insurance and savings. Therefore, the holder can adjust the proportions of the policy based on external conditions. If the savings are earning a poor return, they can be used to pay the premiums instead of injecting more money. If the holder remains insurable, more of the premium can be applied to insurance, increasing the death benefit. As opposed to whole life, the cash value investments grow at a variable rate that is adjusted monthly. There is usually a minimum rate of return. These changes to the interest scheme allow the holder to take advantage of rising interest rates. The danger is that falling interest rates may cause premiums to increase and even cause the policy to lapse if interest can no longer pay a portion of the insurance costs.

Variable universal life adds to the flexibility of universal life by allowing the holder to choose among investment vehicles for the savings portion of the account. The only differences between this arrangement and investing individually are the tax advantages and fees that accompany the insurance policy.