There are two basic kinds of life insurance: term and permanent. Many variations of these forms of life insurance also exist, the most popular being universal life.
TERM INSURANCE
Term insurance does just what the name implies - provides protection for a "term" of time. Term insurance is considered temporary protection.
Death benefits are paid if you die within the term for which the policy is written. Some term insurance can be renewed without a medical examination. Premiums will increase each time you renew because you are older.
Term insurance provides the greatest amount of coverage per premium dollar. Most policies are "convertible", which means the policy can be traded for permanent life insurance protection without evidence of insurability.
PERMANENT INSURANCE
Permanent life insurance provides you with protection as long as you live. Annual premiums are averaged over your lifetime, so the premium does not increase as you get older. As a result, the early premiums are higher than what you would pay for an equivalent amount of term insurance. In the long run, permanent insurance is more economical when compared to renewing term insurance at higher rates.
The most basic type of permanent insurance is "whole life". Whole life policies accumulate cash values on a tax-deferred basis. The cash value can be used for a variety of purposes, including:
- Pay short-term obligations with a policy loan. If you die before the loan is repaid, it is deducted from the life insurance proceeds.
- Pay premiums to keep your policy in force.
- Buy a reduced paid up policy if you wish to stop making premium payments completely.
The case value is available if you elect to cancel the policy. You may pay federal income tax on the amount of cash value that exceeds the premium you paid into the contract.
UNIVERSAL LIFE
Universal life insurance combines features of both term and permanent insurance. Universal life not only offers life insurance protection, it also accumulates cash which is credited with tax deferred interest earnings. The amount you earn depends on current interest rates.
The premiums you pay are added to the account value portion of your universal life policy. Each month a deduction is made from the account value to pay for life insurance protection and other benefits and riders. A monthly administrative fee is also deducted from the account.
Universal life is a flexible premium policy, allowing you to vary the timing and amount of your premium payments. Benefits continue as long as there is enough surrender value to pay the insurance and administrative charges.
You can obtain cash from your universal life policy by borrowing or withdrawing from the account value.
