Understanding Life Insurance
Simply, there are two types of life insurance: Term and Permanent.
Term Life Insurance provides life insurance protection for a specified period of time. Sometimes called "temporary life insurance", term life pays an agreed amount of death benefit, tax-free to your beneficiary if you die during the "term". The duration of the term is typically 10, 20, or 30 years. Term life insurance is very popular due to high death benefit amounts for a very small premium. The catch is, that you may outlife the term. In this case, premiums are lost.
For coverage to continue after the term, you may be able to convert your term to a permanent policy. The permanent rate will be much higher, based on new age, but with no extra medical underwriting. This is a great option for someone who still needs coverage at the end of the term, but is no longer insurable applying for a new term policy. However, if you can qualify, a new term policy may be purchased.
Permanent Life Insurance remains in force for your entire lifetime (or until age 100 or 120), provided premiums are paid as specified in the policy. Whole life, Universal Life, and Variable life products are often called "Permanent life insurance", Permanent life insurance acts much differently than term.
Permanent insurance, conceptually, is a guaranteed pay out from the insurance company. As long as you pay your premiums, your policy will be in force your whole life, and eventually pay a death benefit to your beneficiaries.
To fund this, premiums are usually much higher than term. However, premiums are not lost as an expense as with term. Instead, only some of your premium pays for the insurance company's expenses, and the risk you die prematurely; the remaining premium is set aside and grows, tax-deferred, with interest. The interest earned may be a fixed rate, based on the perfomance of an index (such as the S&P 500) or variable, based on the perfomance of investments you choose.
The goal in many cases is for your interest-earning premiums to grow, over time, to approximately the size of the death benefit. In many cases the cash value can exceed the amounts you've paid in premiums, due to the tax-deffered growth. The death benefit paid out, is essentially your own money. The cost of the insurance is low, non-existant, or even results in a financial gain. It's as if, you had invested and saved up for your own death benefit, but with the added benefit of having the life-time protections, and certainty throughout your whole life. For this reason, Permanent insurance is a popular tool when formulating a financial plan you can count on.
Instead of spending money on term insurance that you outlive through the years, eventually growing too old or ill to qualify for additional term insurance right when you need it most, you or your beneficiaries have lifetime protection with several options to receive your money back.
You do not need to die to access the cash build-up of your premiums in a permanent policy. You may take loans against the accumulated value, or make partial withdrawals, keeping coverage in place, or a full withdrawal by surrendering the policy (withdrawals pusuant to policy provisions and IRS regulations). Certainty, tax-deffered growth, and strategic policy loans and withdrwals can be an invaluable tool in a borader financial plan.
Choosing the right policy is a personal decision that should fit with your particular financial situation and plan. Both term and permanent insurance have their strengths and weaknesses. Our independent insurance agents can help to locate coverage, explain costs and policy provisions, and work along side your legal, financial, and tax team to help you secure the right policy for you.