All life insurance products fall under one of two broad types: term life insurance and permanent life insurance.
Term insurance is the simplest form of life insurance. It allows policyholders to purchase coverage for a specific period of time at a specific price. Term insurance is normally less expensive than permanent insurance.
Permanent insurance does not expire. It remains in place as long as premiums are paid.
When individuals purchase term life insurance, they pay a specific premium to buy life insurance coverage for a specific period. If the policyholder dies during that time, his or her beneficiaries receive the benefit from the policy. If he or she outlives the term of the policy, it is no longer in effect. The person would have to reapply to reinstate the coverage.
Unlike permanent insurance, term insurance only pays a death benefit. That’s one of the reasons term insurance tends to be less expensive than permanent insurance.
What types of permanent life insurance are there?
There are three broad types of permanent life insurance. The first of these is whole life insurance.
Whole life insurance
Whole life insurance is life insurance that remains in force for the policyholder’s whole life, as long as he or she remains current paying premiums. In exchange for these fixed premiums, the insurance company promises to pay a set benefit when the policyholder dies.
Unlike term life insurance policies, whole life insurance policies build up cash value—effectively a cash reserve—that pays a modest rate of return. The growth on this cash value is tax deferred.
With whole life insurance, withdrawals of earnings are fully taxable at ordinary income tax rates. If you are under age 59½ when you make the withdrawal, you may be subject to surrender charges and assessed a 10% federal income tax penalty. Also, withdrawals will reduce the benefits and value of the contract.
Universal life insurance
Universal life insurance is permanent life insurance that goes one step further than whole life insurance: it provides a flexible premium and, by extension, a flexible benefit.
That means, within certain limits, the policyholder decides how much to put in above a set minimum. This potentially raises the face value of the policy.
Like whole life insurance policies, universal life insurance policies accumulate cash value—cash value that grows tax deferred.
Variable universal life insurance
Variable universal life insurance is a form of universal life insurance. It is permanent insurance that provides a flexible premium and an adjustable benefit—meaning the policyholder decides how much to put in above a set minimum, potentially increasing the face value of the policy.
But there’s an important difference.
With a variable universal life insurance policy, the policyholder directs how premiums are invested by allocating them to one or more investment subaccounts. This provides access to the potentially higher returns provided by the financial markets. It also means returns could underperform those provided by other life insurance products.
Variable Life Insurance
Variable Life Insurance allows you to put the value of the policy into an investment account managed by the insurance firm. Your premiums will fluctuate depending on how well your investments are doing.
Variable life insurance is sold by prospectus only. Investors should consider the investment objectives, risks, charges, and expenses of the variable insurance contract and sub-accounts carefully before investing. The prospectus contains this and other information about the variable insurance contract and sub-accounts. You can obtain contract and underlying sub-account prospectuses from your financial representative. Please read the prospectus carefully before you invest or send money and assess your need for death-benefit coverage.
Everyone’s situation is unique. This information is not intended to be a substitute for specific individualized legal advice, and we suggest you discuss your specific situation with a qualified legal advisor. As always, feel free to contact us with any questions as to how these issues may fit into your overall financial plan!