Whole Life Insurance
A whole life insurance policy is a life insurance policy that pays a benefit on the death of the insured and also accumulates a cash value.
Whole Life Insurance policies have a predetermined face amount for which the insured is covered for as a death benefit. The face amount for which the insured is covered does not change over time and will never be adjusted unless otherwise stated in the policy. Instances of a different pay out amount being awarded to the family of the insured are rare, however this does happen and is all dictated by the stipulations of the individual policy that has been written. Whole Life Insurance policies are in force until the insured passes away or until the time at which the insured reaches the age of 100. In this instance, the insurance company will cash in the life insurance policy and award the insured the funds available based off the policy face amount rather than wait until time of death to pay the funds to the beneficiaries as listed on the policy.
Many enjoy using this type of policy because of the simplistic nature of the policy type. The insured signs up for a predetermined face amount to be insured for, the premium is paid on time for life, the insured’s family is awarded the funds stated in the face amount of the policy upon time of death of the insured. Although the most basic form of life insurance, this by far is the preferred mode of insurance for many individuals seeking coverage. Furthermore this is by far the most widespread type of insurance when asking the general public how life insurance works. There are some negatives associated with a Whole Life Insurance Policy. One of the key negatives with owning and being insured by a Whole Life Insurance Policy is that premiums on this type of policy tend to be out of some insured’s price range. Because the policy is insuring a particular face amount as a guaranteed payout upon the insured’s death, the insuring entity must collect more premium for the policy due to the mandatory payout regardless of how long the insured may survive. This cost is offset most by the time at which the insured takes of the life insurance policy. At a younger age, the insured will pay much less of a premium because the amount of time the insured will have to pay off the policy before estimated time of death will be much longer. However, if the insured takes out a Whole Life Insurance policy later in life, the premium will be much higher due to the fact that the insuring entity anticipates the demise of the insured much sooner, therefore they much collect more of the premium at a much faster rate in order to protect the company from losing money when the guaranteed payout date arrives.
The other potential negative of and insured choosing a Whole Life Insurance policy is that the policy is completely independent from any form of stock market growth or fluctuations. Many see this as a pro to a Whole Life Insurance policy, however many will see the missed opportunity. For example, once the policy is taken out, if the stock market has an unexpected surge in market growth and expansion over the course of the next twenty years while the insured is covered, the payout amount will not reap the benefits of this grow and by default will not scale with the market. For example, that $50,000 that the insured was once covered for could have potentially been worth $120,000 after the market growth took place, however the insured’s beneficiaries will still only receive the original $50,000 face amount.
Term Life Insurance
Term Life Insurance is a type of life insurance that pays a predetermined face amount to the insured’s beneficiary in the event of the death of the insured during a specific, predetermined amount of time.
Term Life Insurance is another type of basic life insurance that is easy to understand. The predominant purpose of this type of life insurance is to protect something for the insured for some amount of time, but not to provide security for life. An example of this may be, the insured has a child that they are saving money for to send to college. This may be an attainable goal, however the insured would like an extra precaution to help out in the even something may happen to him or her before they finish acquiring the necessary funds to meet their goal. This is where a Term Life Insurance policy will come into play and fill a specific roll. The insured may have a goal of saving $150,000 for a son’s college education and want coverage for that need but obviously, will not have that need permanently seeing as in ten years, the child will be attending college.
The largest benefit to having Term Life Insurance is the face amount that can be acquired for the amount the insured will have to expend to receive the coverage. Compared to most other forms of life insurance, Term Life Insurance can be acquired for a fraction of the cost of comparable types of life insurance for the same face amount. In some cases, the premium amount paid by the insured can be as much as 60% less for the same face amount on a different type of insurance policy. This can easily be achieved because of the time limit imposed on a Term Life Insurance policy. Generally speaking, if the insured lives past the predetermined time frame, or term, of the insurance policy, there will be no coverage available.
Because the insuring entity has a high likelihood of not actually having to payout the face amount on the policy, they are able to charge much less of the premium for the coverage as a whole. Some insuring entities offer a Permanent Term Life Insurance policy that will stay in force as long as the premiums are paid for the insured for the remainder of the insured’s lifespan, however the premium is marginally higher on these types of Term Life Insurance Policies, and once the original term of the life insurance policy has expired, the face amount that is put in place for the insured is always of a much lesser amount than the original face amount at the time of inception for the policy. The fact that Term Life Insurance tends to be the cheapest life insurance and a moderately simple type of plan to understand, both lead to Term Life Insurance being one of the leading types of life insurance policies sold in the United States of America today.
Universal Life Insurance
Universal Life Insurance is a type of flexible permanent life insurance offering the low-cost protection of term life insurance as well as a savings element similar to whole life insurance, which is invested to provide a cash value within the life insurance policy itself.
Universal Life Insurance has many moving parts, however this leads to the best of many different types of life insurance being lumped all into one. The premiums are lower on Universal Life Insurance because of the aforementioned structure. There is less risk for the insuring entity, so therefore, they can charge lower premiums for the coverage that is extended to the insured. The Universal Life Insurance policy also has the benefit over a Term Life insurance policy of being permanent without at specific cut off time for the death benefit of the insured to no longer be available.
Finally the Universal Life Insurance policy offers a benefit of accumulating cash value just as a traditional whole life policy does over time. The cash value of a life insurance policy is the amount of money that has build up in the policy due to the premiums being paid by the insured. This is important in the particular instance of an insured “cashing out” a life insurance policy. This means the insured will diminish the face amount of the policy by a certain amount of money in order to take those funds and do with them what they please, or cancel the entire policy all together and take the amount of money that has build up over the years in the policy. All of these factors combine to make a very solid life insurance product in the Universal Life Insurance policy. The predominant negative to most individuals acquiring and being comfortable with the Universal Life Insurance product is their ability to understand all of the workings of the policy itself. Because the Universal Life Insurance product is not as straight forwards as the Whole Life Insurance product or the Term Life Insurance product, many simply veer away from it to more simplified means of acquiring coverage.
Variable Universal Life Insurance
Variable Universal Life Insurance is very similar to Universal Life Insurance in that it is a permanent life insurance policy and that it builds up cash value within the policy as time goes on.
The key difference in the Universal Life Insurance policy and the Variable Universal Life Insurance policy is that a cash value account exists within the Variable Universal Life Insurance policy which is invested in a number of sub-accounts available in the policy. A sub-account acts similar to a mutual fund, except it’s only available within a variable life insurance policy. All of the benefits and upsides that come along with the Universal Life Insurance policy are present here in the Variable Universal Life Insurance Policy. However, an insured has the one added benefit of potentially benefiting from the stock market growing over time as an investment while still have the traditional benefits of the Universal Life Insurance policy as well. This is a major plus for some insureds as they see the potential market growth as a much larger earning potential of the life insurance coverage that they carry over any of the lesser types of life coverage. One notable negative to a Variable Universal Life Insurance policy is that, again, most potential insureds will not be comfortable with the many different facets of a Variable Universal Life Insurance policy and will prefer a much simpler form of coverage.
Most importantly however, the second negative to Variable Universal Life Insurance is the double edged sword of cash value account attached to the policy that is invested for the policy. Just as the policy stands a great chance of receiving additional gains from being invested in the market, the policy could just as well lose the portion of the cash value account that is placed within the market. The only backstop to this being a possible outcome is if they insuring entity places a clause in the policy stating that only a portion of the investment made with the investment account is subject to be lost due to market fluctuation. There are more specific options and viable compensations made by some insuring entities when offering a Variable Universal Life insurance policy, however these tend to be quite different from one insurer to the next. For these specific details, check more thoroughly with your actual broker on what the specifics are on the Variable Universal Life Insurance policy you plan to purchase.
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