A life insurance policy is a contract between you and an insurance company. You agree to pay a “premium” each month to keep the policy active. If you do not allow your policy to lapse by failing to pay your premiums, your insurance company will pay your beneficiaries a lump sum of money after you pass away.
You have two different types of life insurance policies. You can purchase a term life insurance policy, or you can buy a whole life insurance policy.
Term Life Insurance Explained
The term life insurance policy is the simplest type of insurance policy you can buy. This contract only lasts for a pre-determined number of years. You can purchase a policy for just one year, or you can buy one that expires after five, 10, 20 or 30 years. If you decide that you need to continue to have coverage after the expiration date, you will need to renew the policy.
Term life insurance is a way for you to ensure that your family can meet their financial goals in the future if you pass away before your youngest child has completed his or her education. It can also be used to pay your mortgage in full and to keep your family business going.
Whole Life Insurance Explained
Once you have purchased a whole life insurance policy, you will own it your entire life. This is a huge advantage over term life insurance. Your premiums will be set at the beginning of the policy, and they will not increase as long as you own it. This is another difference between whole life and term life insurance.
One of the biggest differences between term life insurance and whole life insurance is the fact that whole life insurance accumulates cash value. This creates a sum of money that you may be able to borrow against if you ever need to do so. To reap the benefits of this type of policy, you only need to ensure that your premiums are paid on time so that the policy remains active.
You have the ability to choose between at least three different types of whole life insurance policies. They are universal, variable life and variable universal policies.
Universal Life Insurance
Universal life insurance offers you a cash value component. A portion of your premium payment is set aside and gathers interest each month. This cash value is used to pay the fees associated with the account.
Life insurance is a product that does not benefit the person who is being insured; it benefits the person who is designated as the “beneficiary,” but with universal life insurance, the owner of the policy can receive some benefits. For example, you may be able to obtain a loan against your policy, and you will not necessarily have to re-pay this loan, but you will need to make interest payments. Also, your policy may allow you to take tax-free withdrawals.
Variable Life Insurance
Variable life insurance also has a cash value, but it includes an investment component as well. The cash value is deposited into the policy’s investment accounts that are known as “sub-accounts.” These sub-accounts are like mutual funds, and you will have several different options to choose for your policy.
As your cash value grows, it will not be taxed as ordinary income. You may also be able to receive this money as a loan that will not be subject to taxation.
Variable Universal Life Insurance
The variable universal life insurance policy also provides you with the ability to invest in sub-accounts, and these sub-accounts will be invested in stocks and bonds. The advantage of this type of account is the fact that it offers you flexibility because it allows you to make payments of varying amounts. For example, you may decide not to make a payment one month, but you can also decide to pay the maximum amount the next month. This is different from other types of whole life insurance policies because the other policies have fixed payments.
Similar to the variable life insurance policy, you may either borrow from your cash value or take a loan against the cash value in this account. Of course, the cash value grows at a tax-deferred rate and offers a death benefit to your heirs.
How Life Insurance Can Be Used
Your beneficiaries can use their death benefits for many purposes. With a universal life insurance policy, your beneficiaries will be able to pay your final hospital expenses if your health insurance doesn’t cover everything. They can also pay your funeral and burial costs.
If your beneficiary has minor children left in the home, the benefits can be used to support the family. If there are any debts left to be paid, these can also be paid with the death benefits. If your estate is subject to taxation, your heirs will have the means with which to pay these taxes without having to liquidate your assets.