A life insurance policy is a contract between a policy owner and the insurance company. If the named insured dies while the policy is in force, the beneficiary will receive a payment (death benefit) from the insurance company. Life insurance can also be used to create an estate, pay estate taxes, fund a business transfer, replace a charitable gift, equalize inheritances, or as a possible solution for other perplexing financial problems.
Types of Life Insurance
- Term Insurance - Term insurance provides death benefit protection for a stated period of years and can be purchased with level premiums that typically last for 10, 20, or 30 years. Generally, term insurance policies do not have cash values.
- Whole Life - As a form of permanent insurance, whole life is a guaranteed contract that offers level premiums and death benefits, as long as the premiums are paid on time. Because whole life is guaranteed, the premiums typically are higher than other permanent policies, and the policy is not flexible. Since the guarantee is based on the claims-paying ability of the insurance company, it is important to choose a reputable firm. The cash value component has the ability to increase based on the performance of the insurance company's portfolio.
- Universal Life - Universal life is a type of permanent insurance suitable for the person who wants less cash value guarantees than whole life but likes the idea of greater flexibility. Premiums on a universal life policy are usually lower than they would be on a whole life plan, but so is the cash value build-up. Most universal life policies are tied to interest rates. Depending upon the plan, the interest rates can either be fixed or based on current assumption, where the rates may change every year. Variable universal life plans are also available, which allow you to choose from different subaccount investment options. This feature enables you to have your cash value component tied to the market instead of to an interest rate. However, you must remember that you assume greater risk with a variable universal life plan in exchange for the potential upside of the market.
With permanent insurance, such as whole or universal life, the cash value grows tax-deferred, and withdrawals - up to the cost basis - may be taken free of income tax. Additional dollars may be accessed by taking tax-free loans. However, withdrawals and loans will reduce the account value and the death benefit, and with certain policies, withdrawals prior to age 59 1⁄2 may be subject to a 10% federal tax penalty.
Ask your Financial Advisor for more information about the many different types of policies and companies we represent. We can custom fit a plan specific to your needs.