Understanding Life Insurance

Financial literacy requires at least a basic understanding of life insurance. Though many are uncomfortable talking about life insurance, an individual or household cannot complete a financial plan without preparing for the inevitable. Determining how much life insurance they need often confounds life insurance buyers. Many life insurance agents recommend considering final expenses, living expenses for survivors, the cost of paying off a mortgage, and educational funding goals. Most households fit life insurance premiums into their budgets by purchasing a combination of permanent insurance and less costly term policies.

Understanding the different types of life insurance allows for informed decisions on the type of coverage needed.Start reading for all of the necessary information.

Permanent Life Insurance

Permanent life insurance remains in force until the insured individual dies. The exceptions to this are if the policy owner cancels the policy or fails to pay the premiums. So long as the policy remains in force, the policy always pays the death benefit. Additionally, permanent life insurance policies provide a savings benefit, which may be a cash value that builds up as the insured makes premium payments. In this case, the policyholder has the option of borrowing against the cash value. Alternatively, the savings benefit may consist of invested funds, which the policyholder can withdraw from the policy without a loan. Permanent policies offer tax advantages, such as death benefits and proceeds from a loan against cash value being nontaxable. Invested values withdrawn (as opposed to loaned) are taxable, but only when withdrawn, and they accrue inside the policy tax-free. Permanent life policyholders must ensure any loan balances and unpaid interest never exceed the cash value. In that case, the policy terminates.

Continue reading to learn about the details of term life insurance policies.

Term Life Insurance

When television commercials pitch low-cost life insurance with slogans like, '500,000 dollars in life insurance for just thirty dollars a month,' they are selling term life insurance. It's called term life because the insurance runs for a specified period, as opposed to a permanent policy. Common term lengths are ten, twenty, and thirty years. Term insurance is inexpensive compared to permanent policies because the insurance company calculates the odds of the insured outliving the policy's term as overwhelmingly likely. An insurance company would go out of business if the odds weren't greatly in its favor if it offered 500,000 dollars for thirty dollars a month. For this reason, insurance companies base their term rates on the length of the term, and the longer the term, the higher the required premium. Many companies also consider factors such as the insured's medical history. Term life policies provide no cash value. Insurance agents sell term policies to people who need a high amount of coverage for a period, such as when they have children or a home mortgage. Many term policies offer the option of converting part of the policy to permanent insurance without medical underwriting.

Continue reading to reveal detailed information about universal life insurance.

Universal Life Insurance

Life insurance companies developed universal life insurance, in part, to provide a method of taking out permanent coverage with premium costs comparable to term life. They also developed universal life as a method of creating tax-advantaged savings. Universal life consists of two elements: the cost of insurance (COI) and the cash value (CV). Unlike term insurance, which has a level premium, universal life has a COI that increases each year. Over many years, the premium increases a great deal, especially as the insured reaches certain age brackets. Most policyholders avoid having to pay the higher costs out of pocket because they contributed to the CV in addition to paying the COI. The CV continued to grow over the years through contributions and by earning interest. This CV can then be used to pay the increased COI. Often, enough CV accumulates in the policy to allow the policyholder to skip payments; however, if the CV falls to zero, the policyholder must pay the increased premiums for the policy to remain in force.

Keep going to learn about whole life insurance.

Whole Life Insurance

Whole life insurance derives its name from its design. It lasts for the insured's whole life; provided premiums are paid. Often considered traditional life insurance policies, whole life is the type of life insurance the public knows best. Unlike universal life insurance, whole life's cost of insurance remains level, which means its premium remains level. Whole life builds a CV without contributions beyond the level premium payments. The CV starts very small but builds over time, and then adds to the death benefit. The insured can also take a loan against the CV, though then the loaned amount no longer increases the death benefit.

Often, if experiencing financial trouble, the insured uses the CV to pay the premiums. Whole life policy premiums are many times more expensive than term premiums because the insurance company expects to pay the death benefit eventually. Premiums are substantially less expensive for young people, and it is for this reason many procure a whole life policy early in life. Younger people are also more likely to medically qualify, and insurance companies usually require extensive underwriting before insuring older people. Insurance companies may turn down those with prior health complications or offer much more expensive, high-risk coverage with no medical underwriting. Many individuals carry both whole life and term life policies, and always keep the whole life policy for final expenses.

Continue reading to learn about variable life insurance.

Variable Life Insurance

Variable life works in much the same way as a universal life policy with several key differences. The largest benefit of a variable life insurance policy is the ability to invest the cash value in a variety of investment vehicles, including stocks, bonds, and mutual funds. Because of this, the government considers variable life insurance a security. In a universal life policy, the insurance company guarantees the cash value won't diminish in a down market. A variable life policy, on the other hand, subjects the cash value to market risk. If the cash value increases, variable life provides a way for the policyholder to utilize his market gains with a tax advantage. As long as the policyholder takes the proceeds in a loan instead of as a withdrawal, they are tax-free.