When writing a blog post about life insurance I tend to default to the most recent knowledge I’ve acquired or sometimes even the most complex or cutting-edge. The unfortunate reality is that so many people don’t understand the basics of life insurance, so I thought it would be a good idea to devote some time to the fundamentals.
Below I outline the differences separating the various types of life insurance products. The goal was not to get too granular on any particular insurance carrier’s product offerings, but rather to provide a broad basis for understanding how various product types work. We will be making a concerted effort to incorporate Life Insurance Fundamentals as part of our normal blog postings.
Whole life insurance is a permanent policy, which gives you guaranteed protection for your loved ones that lasts a lifetime. With whole life insurance, unlike term, you build guaranteed cash value, which you can use however you want.
Participating whole life insurance is eligible to earn dividends, which can be used to increase the death benefit and the cash value of the policy. Dividends can also be applied towards helping to pay premiums- either in part or in full.
Current Universal Life
A universal life insurance policy offers permanent life insurance with flexible premiums, which means you can adjust the amount you pay each year. As long as there is enough value in your policy to cover the cost of insurance and administrative charges, you can decide how much premium to pay within certain limits. This means you have the option to pay extra sometimes, and less when you might need to.
Depending on the premium you choose to pay, your policy may build account value. And if your policy builds enough account value, you can borrow from your policy for any reason you choose.
Guaranteed Universal Life
These policies specify a premium that is to be paid in exchange for guaranteed death benefit to a predetermined point in time (e.g. age 95, 100 or insured’s lifetime). A Guaranteed Universal Life is designed to be a lower-cost Universal Life policy option with a focus on the lifetime guaranteed death benefit not cash value.
There is considerably less premium flexibility with GUL policies and policyholders risk policy lapse with either a missed, late or inadequate premium payment.
Variable Universal Life
If you need a permanent life insurance policy that lets you make your own investment choices within your policy, consider variable universal life insurance (VUL). VUL has flexible premium payments, allowing you to choose the amount and the frequency of your payments within certain limits. Where policy values are sufficient, premium payments can be skipped.
A VUL policy provides access to many different investment options, which allows you to choose options that align with your goals and tolerance for market and investment risk.
Term insurance is typically purchased by individuals who need coverage for a temporary period or who need a large amount of insurance at a low cost. This product category provides life insurance protection that remains level for a predetermined amount of time; usually either Yearly Renewable, 5, 10, 15, 20, or 30 years. Term is usually the least expensive type of insurance and there is no potential for cash accumulation.
Many of these products are renewable after the level term period has ended. After each term is up, policyowners will have the opportunity to extend coverage for an additional period of time. But at this renewal point, the premium payment will most likely increase substantially.
Another benefit to look for with term life insurance is the ability to convert the policy to a whole or universal policy without providing additional evidence of insurability. This could be a significant benefit if an insured individual develops health problems or advanced risk factors, which would preclude her from obtaining permanent life insurance.