Question

Discuss what type of life insurance policy you believe would be the right one for you to purchase right now and why. If you don’t believe you need an insurance policy now, explain why, and then define one of the types mentioned in the chapter.

Answer 1

When many people think of life insurance policies, they usually don’t think of all the types of life insurance, they only think term.

Term life insurance policies are the simplest, most popular, and the most often purchased; but, in the life insurance menu of options, it’s not the only choice. Far from it, actually.

Today, there is a wide variety of life insurance policies available, the most basic of which are term and permanent. Within each of these categories, however, there are many different types to choose from – and being familiar with these can help you better customize the coverage to meet your specific needs.

Term life insurance

Term life insurance is considered to be the most basic of life insurance that can be purchased. This is because term life offers just pure death benefit protection only, without any cash value builds up within the policy. Because of this, term life insurance is often very affordable – especially for those applicants who are younger and in good health at the time they apply for the coverage.

With term life insurance, coverage is purchased for a certain length of time, it could be as short as a 5 year policy, a short term life insurance plan or longer terms such as for ten years, 15 years, 20 years, 25 years, 30 years – and in some cases, even longer.

There is also a 1-year renewable term life insurance option that is offered by many of the best life insurance carriers.

Typically, when purchasing a level term life insurance policy, the amount of the premium will remain the same throughout the period that the policy is in force. Provided that the insured survives throughout the time period of the policy, and he or she wishes to remain covered by life insurance, they will need to re-qualify for a new policy at their then-current age and health status.

At that time, the premium on a new life insurance policy may be quite a bit higher. In some cases, a term life insurance policy may have an option to convert the coverage over into a permanent life insurance plan.

Permanent life insurance

Permanent life insurance is different from term insurance because it offers both death benefit protection, as well as a cash value component. It also differs because, as the name suggests, it does not have a time limit like term insurance, but rather is intended to last for the remainder of the insured’s lifetime – provided that the premium is paid. There are many different types of permanent life insurance.

Whole Life Insurance Coverage

The simplest type of permanent life insurance coverage is whole life. With this type of coverage, the premium amount is locked in and will remain the same throughout the entire lifetime of the policy.

This can be helpful for those who need to stick to a budget. It also means that if a person purchases a whole life policy at a very young age, they will still pay the same amount of premium when they get older – regardless of advancing age, or even an adverse health issue.

In some cases, where a person’s pre-existing conditions require the individual to buy high-risk life insurance, some graded whole life policies are the only option.

The cash that is in the cash value component of a whole life insurance policy is allowed to grow on a tax-deferred basis. This means that the gain on these funds will not be taxed until or unless they are withdrawn – allowing them to compound exponentially over time.

At first, the cash in a whole life insurance policy will grow slowly. This is because the majority of the early premium dollars will go towards paying the agent’s commission and the insurance costs. However, over the years, the cash in a whole life policy can steadily grow, often with a minimum guaranteed rate of return.

Some whole life insurance policies will even provide dividends to their policyholders. Because these are considered to be a return of premium to the policyholder, they are also not taxed. Dividends can also help the cash value in a policy grow significantly – although they are never guaranteed.

Key man life insurance

Key man life insurance, or corporate-owned life insurance, protects a company in the event of the loss of an employee who plays a significant role in the business.

Employees covered by this type of life insurance might include executive officers, specialized skill players, and highly effective members of the salesforce.

Key man policies are unique in that the beneficiary and the policyholder are one in the same. The company simply informs the employee they will be purchasing a policy to insure them. With the employee’s signature in hand, they can purchase a policy.

Key man insurance can provide companies with a solid source of protection for their businesses.

Universal life insurance

Another form of permanent coverage is universal life insurance. This type of life insurance also provides a death benefit and a cash value component where the funds are allowed to grow tax-deferred.

Universal life insurance is more flexible than whole life coverage because the policyholder is allowed – within certain guidelines – to choose how much of his or her premium dollars will go towards the policy’s death benefit, and how much will go towards the policy’s cash value.

Because universal life is a permanent life insurance policy, the policyholder will have access to their cash value account. So, just as with a whole life plan, the cash can be borrowed or withdrawn for any reason – including paying off debt, supplementing retirement income, or even going on a vacation.

There is also an Indexed Universal life insurance policy available that will can aggressively grow your cash value in the policy over time, but you have to be aware of the disadvantages of this type as well.

A CLOSER LOOK AT THE TAX BENEFITS OF LIFE INSURANCE

These tax benefits within a universal life insurance policy are similar to 401ks and IRAs. Annual earnings on the investment part of the policy don’t get taxed, and any taxable gains when cashing out on a policy can be reduced by the amount of insurance protection the plan provides. Furthermore, in the case of death, the policy holder’s gains usually aren’t taxed.

Such policies can offer a range of investment options, including stocks, bonds, balanced mutual funds, international mutual funds and money market accounts. When deciding to invest, work with an advisor just as you would a financial advisor, and always invest just as much as you foresee needing, neither more nor less.