Life Insurance: A Smart Part of Your Financial Plan
Typically, when we think of insurance, we think of car insurance or homeowner’s insurance – a policy that we pay into, but hope we never need. There’s another type of insurance that can help you build assets and protect what you already have. It’s called permanent life insurance, also referred to as cash value life insurance.
Life insurance has come a long way since its inception when the sole purpose was to protect income in case of a wage earner’s death. Today, life insurance comes in a variety of types and provides a range of financial uses. While its primary benefit is still to provide cash to your family after you die, life insurance also can help people save for retirement, manage an estate, add to a college fund and more.
The different types of life insurance generally fall into two categories: term insurance and permanent insurance.
Term insurance is often used for temporary needs because it covers a specific timeframe – usually between one and 20 years. In general, term insurance has these features:
- It is used to insure a life when there is a specific financial obligation, such as a mortgage, during a set period of time.
- It pays a benefit only if you die during the term.
- Premium rates increase when the term expires and you want to renew.
- Some policies require a medical examination and a certain level of health at renewal to qualify for re-entry rates.
- Term policies usually do not accumulate cash value.
- Premium rates are less expensive than permanent insurance, particularly for younger people.
- Term insurance can become quite expensive if carried well beyond the initial coverage period.
Permanent insurance is designed to protect you throughout your entire life. Several types of permanent policies that offer various premium rates and payment schedules are available. Permanent insurance is designed and priced for people to keep for a long period of time, according to the American Council of Life Insurance. If you don’t intend to keep the policy for the long term, this may not be the right insurance for you.
Most permanent policies have “cash values” that are different than their “face amounts.” The face amount is the sum of money paid at death. Cash value is an accumulation of money in the policy that can enable you to:
- Take out a loan against the cash value of the policy.
- Use some of the accumulated cash at retirement to help pay living expenses.
- Use the cash value as “paid up” insurance, allowing you to not pay premiums for a specific period of time.
- Cancel the policy after a period of time and receive the cash value.
Each of these examples has conditions that may affect the value of the policy. A qualified financial advisor can discuss specific features with you.
The three main types of permanent life insurance are called whole life, universal life and variable life. Combinations of these are also available. Here are the basic features of each:
- Whole life: This is historically the most common type of permanent insurance it has fixed premiums, cash value and a constant face value.
- Universal life: This type is also known as “adjustable life” because after the initial payment, you may adjust the amount of your premium payments and the time at which you pay them. These adjustments are subject to certain minimum and maximum payments. You may also increase or decrease the death benefit. The cash value of the policy often depends on the investment performance of fixed interest rates.
- Variable universal life: This policy offers cash value feature that fluctuates with the performance of a portfolio of investments. You can specify how you want your premiums allocated among various subaccounts with underlying funds that invest in stocks, bonds and other investments ranging from conservative to aggressive. The cash value of a variable life policy is not guaranteed, it is possible to lose money, so you should carefully consider your risk tolerance before purchasing a variable policy. Some variable life policies offer guarantees of the death benefit, often for a stated minimum premium or additional fee.
Life insurance is an essential part of protecting your financial health during your lifetime and beyond. A qualified financial advisor can discuss your life insurance needs and suggest a policy that may be right for your financial goals. Many kinds of life insurance policies are available to meet a variety of needs, and the right product can offer a foundation of support and security for you and your family.
The views expressed represent the opinions of Benedetti, Gucer & Associates and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person.
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