Life Insurance 101
There are 5 Major Myths about Life Insurance.
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The Difference Between Term and Permanent
TERM
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Term life insurance is designed to provide financial protection for a specific period of time, such as 20 or 30 years. Typically, premiums are level and guaranteed for that time. After that period, policies may offer continued coverage, Usually at a substantially higher premium. Term life insurance is generally a less costly option than permanent life insurance.
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Needs it helps meet:
Term life insurance proceeds are most often used to replace lost potential income during working years. This can provide a general safety net for your beneficiaries and can also help ensure the family's financial goals will still be met—goals like paying off a mortgage, keeping a business running, and paying for college. It's important to note that, although term life can be used to replace lost potential income, life insurance benefits are paid at one time in a lump sum, not in regular payments like paychecks.
How Universal (Permanent) Insurance Works
PERMANENT
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An umbrella term for life insurance plans that do not expire (unlike term life insurance) and combine a death benefit with a savings portion. This savings portion can build a cash value - against which the policy owner can borrow funds, or in some instances, the owner can withdraw the cash value to help meet future goals, such as paying for a child's college education. The two main types of permanent life insurance are whole and universal life insurance policies.
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Needs it helps meet:
IRS-approved tax advantages, protection against stock market volatility, flexibility and control; the list goes on and on.
With an IUL there are no taxes due during the accumulation phase when building cash value. When you retire, you can take tax-free distributions of that cash value. When you die, the tax-free death benefit moves outside of probate to your loved ones.
Most importantly, unlike retirement accounts, you have access to the cash value at any age, any time, for any reason, without paying taxes or penalties. IULs also allow a tax-free exchange of one policy for another and the flexibility to change death benefit amounts, premium amounts and payment frequency at any time.
TYPES OF PERMANENT INSURANCE
Variable Universal Life (VUL)
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This type of policy provides the flexibility of Universal Life and adds an investment capability as well. A VUL has investment options (called subaccounts) that you can choose to invest in stocks, bonds and other funds with. You decide how the premium parts (aside from insurance costs) are invested. Though this type of policy does not have a cap on the investment, it also participates directly in the investment which means that if the investment does poorly, so does your cash value.
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Whole Life
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This is what most people think of when we talk about "Permanent Insurance". This type of policy generally has the highest premiums because of the way it is calculated from inception. If you pay your premiums on time, this type of policy will stay in force your entire life and build some cash value though not really the best fit for that purpose due to the higher premiums though there are hybrids out there that may be a great fit to provide for Long Term Care..
Universal Life (UL)
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This type of policy allows you to earn interest within the policy with more flexibility than that of a Whole Life policy. You choose the payment schedule (more one year, less the next) and you have the potential to earn far more cash vaule. Most UL policies earn a minimum interest rate providing more security and you generally can borrow or withdraw from the cash value that accumulates.
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Indexed Universal Life (IUL)
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Unlike most UL policies that declare interest rates in advance determining how the policies will be credited in advance, the IUL can credit based on the performance of financial indices (S&P 500, Russell 2000, etc.). Though credited from these indices, it's important to note that these policies are NOT directly invested in them ever. Cash value allocated to the index is usually credited with interest based on the change in the index value from one year to the next (Annual Point to Point). Each index includes a maximum gain (Cap) and a minimum value (Floor). This protects clients from loss and puts a limit on upside potential.
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