Today, we welcome Al Lurty as a new guest contributor to the FinancialVerse blog. Al brings over two decades of experience in the life insurance industry in product knowledge, development and consumer education. His credentials include being a Fellow, of the Life Management Institute (FLMI®) and he holds both the Retirement Income Certified Professional (RICP®) and Wealth Management Certified Professional (WMCPTM) designations from The American College of Financial Services.
If you’re new to the idea of owning life insurance, you may be wondering what the various types of life insurance are. There are two broad types of life insurance: term life and permanent life. Both kinds provide a death benefit that is tax-free to the beneficiary.
Term life, as the name implies, is a traditional product that provides relatively inexpensive death benefit protection for a chosen period or term. Historically, this plan had premiums that increased every year reflecting the increasing chance of death as one grows older, and also reflecting mortality differences by gender and whether or not the person used tobacco. And, like auto or home insurance, those rate tables could be increased overall for everyone, within certain limits.
Although annually increasing term is still available, the vast majority of term plans purchased today have premiums that are guaranteed for 10, 20, or 30 years (or even longer) and are usually convertible for a specific period to some form of permanent insurance without the need to provide evidence of good health. Term insurance typically doesn’t develop cash values, although there is a particular type that does which we’ll discuss in a future post. At the end of the term, if the purchaser hasn’t converted, most term policies can be continued, but usually at much higher rates.
Many people tend to overestimate the cost of term life insurance, assuming that a $1 million policy must cost thousands of dollars every year. In fact, for younger healthy people, a 10-year term policy for that amount can cost only a few hundred dollars annually.
Permanent insurance, on the other hand, provides coverage typically for one’s entire life, with premiums that are usually much higher than term life, but which also develop cash value which can be used for many purposes. An important consideration with permanent insurance is that the plans typically develop cash values, which can typically be taken out of the policy via loans or withdrawals, and the annual growth in the cash value is tax-deferred, meaning that no income tax is due on the year-over-year increase.
Also, if the purchaser decides to take cash out of the policy, taxes are only due on the amount taken in excess of the premiums paid. A financial professional can advise a purchaser on detailed strategies and approaches to utilize these features.
Within the broad category of permanent insurance there are several major types, described below:
Whole Life is a traditional permanent product that, as the name implies, provides death benefit protection for the whole of life, even if one lives past age 100. The cost of whole life is multiples of the cost for comparable term, but it offers fixed premiums and tax-advantaged cash value growth, typically from a mutual company that offers non-guaranteed dividends to enhance the cash value or provide additional death benefit.
Universal Life is a newer form of permanent insurance that has been around for about 40 years. It offers flexible premiums and a death benefit that can be increased or decreased. It provides death benefit protection and tax-advantaged cash value growth, which is determined by a variety of approaches.
In future posts, we’ll describe each of the kinds of permanent insurance in more detail. We encourage you to talk to your financial professional about which coverage is right for you.
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