Everyone knows they need life insurance, but what kind? For most people the choice can be broken down into two main policy categories — Term Life Insurance and Permanent Life Insurance. Term Life Insurance has a period of time during which the premium is guaranteed, but after that, the rates can skyrocket dramatically. Permanent Life Insurance, such as whole life or guaranteed universal life, has a guaranteed premium and death benefit which should last as long as you do.
The Benefits of Each
It’s not unusual for people to own each kind, as both types of insurance have their benefits. Term life can give an individual and family coverage for a significant time, say, while children are growing up and perhaps going to college. One or both spouses can be covered. Both may be major earners, or one may be the major breadwinner, but the other spouse may have major responsibilities with children and the home.
The difference from term life is that whole life lasts for an insured's lifetime and the cash value of a whole life policy typically earns a fixed rate of interest. The policy pays a beneficiary or beneficiaries upon the insured's death. Importantly, whole life has a cash savings component, which the policy owner can draw or borrow from. Outstanding loan principal and interest reduce death benefits.
While whole life is the leader among permanent insurance, there are options. One is universal life insurance, which allows policy owners to make changes to both the premium and the death benefit. However, the rate of growth for cash value, is subject to change and is based on an interest rate set by the insurance company. There is still a guaranteed death benefit.
Variable Life Insurance
Another option, aptly named, is variable life insurance. This is influenced by the behavior of the financial markets. The cash value of this insurance grows based on investments in mutual funds that are offered by the life insurance company. The growth of the cash account correlates to broader market trends, so it’s possible to see faster increases than you’d see with other types of permanent life insurance. However, there is no guaranteed minimum cash value. The death benefit for variable life insurance can fluctuate over time but still has a guaranteed minimum amount.
These different types of insurance could benefit you and your family, but as this article outlines, there are nuances, and what is appropriate for one person may not be for another. It’s important to discuss the options with a financial professional.