Life Insurance Series Part One: Types of Life Insurance
By Joe Globensky, RFC®
September has been deemed Life Insurance Awareness Month and as a prelude, given the various questions we receive on life insurance, we thought we would offer an informational series where we introduce the types of life insurance, times in your life where insurance might be most important, and finish up looking at ways to calculate your life insurance needs. Whether you are exploring your potential need for insurance, trying to determine the type of insurance that may be appropriate for your situation, or you already have life insurance but either don’t know why or if it still makes sense, you may find the answers in this series.
Let’s start by examining the types of life insurance. There are three primary types of life insurance – term, whole life, and universal life. Each has its own features, benefits, and costs, which are important in researching prior to purchasing a policy.
Term life insurance is probably the most commonly used of all life insurance. It protects your beneficiaries from financial loss resulting from your death. The policy lasts for a specific amount of time, ranging from 1 – 30 years, and pays a stated death benefit. The policy premiums are set at the start of the policy, and typically do not change until the end of the term. Since term life is designed to last a defined period of time, with the maximum being 30 years, the premiums tend to be significantly lower than the other types of life insurance we will discuss. We like to say that a client is “renting” this protection from the insurance company for a set period of time.
Term life insurance can have variations that include annual renewability, conversion features, and a decreasing death benefit, but we will save those discussions for another time.
Similar to term life, whole life has a stated death benefit and annual premium, however with whole life, the coverage lasts for the entire life of the insured, so it is known as permanent coverage. Whole life offers a cash value that can grow until the policy is surrendered. A portion of each policy premium is split between the cost of insurance, the expenses of the policy, and the cash value. Since whole life is permanent coverage, and part of each premium helps build the cash value of the policy, the annual premiums are higher than for term life where you are only paying for the cost of insurance for a defined time period.
Whole life offers a guaranteed interest rate to be earned on your cash value, with the ability for the interest earned to offset a portion of your annual premium payment.
Universal life is a variation of whole life in that it is permanent coverage lasting for the life of the insured, and it provides a cash value with interest-earning capabilities. The major difference is that universal life is more flexible in that the premiums, cash values, and death benefit can all be adjusted up or down if the insured’s needs change during the life of the policy.
There you have it. The three primary types of life insurance and how they are similar and different. Look for more information in part two of our series on times in your life where insurance might be most important.
About Connections Financial Advisors
Connections Financial Advisors is a comprehensive wealth management firm utilizing an ensemble practice methodology to provide its clients with the highest level of service. The firm offers a broad array of financial services, including retirement planning, tax planning, estate planning, risk management, education funding, investment management, employee and executive benefits.
This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. This article is intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. Guarantees are based on the claims paying ability of the issuing company.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Level Four Advisory Services, LLC, a registered investment adviser. Connections Financial Advisors and Level Four Wealth Management are separate entities from LPL Financial.
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