There are a few different types of life insurance, all with the common purpose of protecting you and your loved ones from bearing a large financial burden in the event of your death. Your needs and fiscal responsibilities will change throughout your life, so it is crucial to understand the basics, and periodically review your coverage to ensure that it's still right for you.
There are two basic types of insurance — temporary insurance , which includes Term Life and Group Life, and permanent insurance , which includes Whole Life, Universal Life, and Variable Universal Life. If you purchase life insurance, when you die the insurance company will pay a death benefit to the beneficiary or organization named in the policy. (In the case of temporary insurance, your death must be during the policy term.)
The choice between temporary and permanent insurance will depend upon your personal goals and objectives.
Temporary insurance
Term Life is one of the simplest, most cost-effective types of life insurance.
It provides the largest immediate amount of protection for the lowest cost.
Beneficiaries are paid the entire amount of your policy (subject to your policies provisions) if you die during the term (usually 5 to 30 yrs)
Those with Term Life coverage generally have a substantial need for insurance protection during a specific period of time. They may be young and have growing families, and need temporary protection now with the option to convert to permanent coverage later.
Group Life insurance typically offered as an employee benefit.
Premiums under group policies are generally lower for younger employees, and higher for older ones.
In addition to employers, some membership organizations such as alumni clubs and unions may also offer Group Life insurance plans.
Permanent insurance
Whole Life insurance combines the security of lifetime insurance protection with the added advantage of tax-deferred cash accumulation.
Provides a death benefit as will whole and group life policies.
Benefit of stable premiums that are guaranteed throughout the life of the policy.
Allows owners to include the cost of their coverage into their long-term financial plans.
People who purchase Whole Life generally want to ensure that when they die, money will be available to pay final expenses, fund college costs, pay estate taxes, care for an elderly parent, or simply allow loved ones to maintain their lifestyles.
Universal Life insurance combines the security of whole life insurance protection with the benefit of policy flexibility in addition to tax-deferred cash accumulation.
The difference between Universal Life and other forms of permanent coverage is the flexibility it offers. Within certain limits, policy owners can increase or decrease their death benefit according to their changing needs without having to purchase a new policy. Likewise, owners can increase, decrease, or cease paying premiums altogether provided the policy has sufficient cash value.
As with Whole Life insurance, people who purchase Universal Life generally want to ensure that money will be available to pay final expenses, help fund college costs, pay estate taxes, care for an elderly parent, or simply allow loved ones to maintain their current lifestyle.
Variable Universal Life insurance (also known as "VUL") combines the security of lifetime insurance protection with the advantages of policy flexibility and tax-deferred cash accumulation through investments.
The difference between VUL and other forms of permanent coverage is the flexibility and growth potential it offers. Policy owners determine how the assets within the policy are invested depending upon their tolerance for risk and the amount of time over which they will be investing.
Within certain limits, policy owners can increase or decrease their death benefit depending on their changing needs without having to purchase a new policy. Likewise, owners can increase, decrease, or cease paying premiums altogether, provided the policy has sufficient cash value.
People who purchase VUL generally want to ensure that money will be available to pay final expenses, help fund college costs, pay estate taxes, care for an elderly parent, or simply allow loved ones to maintain their lifestyle.
They also like the idea of controlling how their cash values are invested and are willing to assume some market risk to create a life insurance program that adjusts to economic conditions.
How much do I need?
Life insurance is intended to provide for your family's financial security, and can help bring peace of mind. Calculating the right amount of coverage to suit your situation can be difficult — and it is dependent on your personal goals and objectives.
Most insurance companies recommend that your total life insurance coverage should equal five to eight times your annual income. Most policy holders will use a combination of the types of life insurance listed above to meet changing needs over the course of their lifetime.
