Life insurance benefits are designed to replace your income in the event you are no longer able to provide for your family. While no one likes to talk about life insurance, it may be one of the best ways to meet your family’s ongoing financial needs at a time when they will need it most. With many life insurance policies available, we know that finding the right policy can be overwhelming. That’s why our dedicated agents are here to help you understand what life insurance policy is right for you.
Term Life Insurance
Term life insurance is “pure” insurance. It offers protection only for a specific period of time. If you die within the time period defined in the policy, the insurance company will pay your beneficiaries the face value of your policy. It may be appropriate if you want insurance only for a certain length of time, such as until your youngest child finishes college or you are able to afford a more permanent type of life insurance.
Term insurance differs from the permanent forms of life insurance, such as whole life and universal life, which generally offer lifetime protection as long as premiums are kept current. Unlike other types of life insurance, term insurance does not accumulate cash value. All the premiums paid are used to cover the cost of insurance protection, and you don’t receive a refund at the end of the policy period. The policy simply expires.
The main drawback associated with all types of term insurance is that premiums increase every time coverage is renewed. As you grow older, your chances of dying increase and as the likelihood of your death increases, the risk that the insurance company will have to pay a death benefit goes up.
Whole Life Insurance
For many years, whole life policies were the predominant type of life insurance sold in America. When you purchase a whole life insurance policy, you traditionally pay a fixed premium for as long as you live or for as long as you keep the policy in force. In exchange for this fixed premium, the insurance company promises to pay a set benefit upon your death.
In addition to providing a death benefit, a whole life policy can build cash value, which accumulates tax deferred. Part of the premium pays for the protection element of your policy, while the remainder is invested in the company’s general portfolio. The insurance company pays a guaranteed rate of return on the portion of your premium that is in its investment portfolio, building up the value of your policy. This buildup in cash value is part of the reason the premiums on a whole life policy generally remain fixed instead of escalating to match the increased risk of death as you age. As the cash value grows, the risk for the insurance company declines.
The fact that whole life policies have fixed premiums and fixed death benefits can be either positive or negative, depending on the situation. To some people, it means one less thing to worry about as they know in advance what they’ll have to pay in premiums and exactly what their death benefits will be. To others, whole life policies don’t provide enough flexibility. If their situations change, it is unlikely that they will be able to increase or decrease either the premiums or the death benefits on their whole life policies without surrendering them and purchasing new policies.
Universal Life Insurance
Universal life insurance was developed to overcome some of the disadvantages associated with term and whole life insurance. As with other types of life insurance, you pay regular premiums to your insurance company, in exchange for which the insurance company will pay a specific benefit to your beneficiaries upon your death.
As with whole life insurance, a portion of each payment goes to the insurance company to pay for the pure cost of insurance. The remainder is invested in the company’s general investment portfolio, with the potential to build cash value. However, universal life policies are very flexible. As the policy owner, you can vary the frequency and amount of premium payments and also increase or decrease the amount of the insurance to suit changes in your situation. For example, if your financial situation improves significantly, you can increase your premiums and build up the cash value more rapidly. On the other hand, if you find yourself under a financial strain, you can reduce your premiums, or you may even be able to deduct premium payments from the cash value of the policy.
It is possible to structure many universal life policies so that the invested cash value will eventually cover the premiums. You would then have full life insurance coverage without having to pay any additional premiums, as long as the cash-value account balance remains sufficient to pay for the pure cost of insurance and any other expenses and charges.
Our agents are here to help you understand your options, and will work with you to find the best life insurance option for your situation. Call your Thompson Insurance Group agent today and let us design a customized life insurance package for you.
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