The basic concept of life insurance is to provide coverage for one’s family or business in the event of death.
Life Insurance Uses
- Cleanup Fund – Used to meet the expenses resulting from the insured’s death and to resolve all outstanding obligations.
- Readjustment Income – A sum of money required to cushion the financial shock of the loss of an income earner.
- Income During Dependency – Used to help support the monetary needs of dependents until they may support themselves.
- Life Income for Spouse – Income potentially needed to support a spouse who requires a stream of additional income.
- Mortgage Needs – Used to allow a surviving spouse or dependent to remain in their residence without the burden of mortgage payments.
- Education Needs – Used to partially or completely fund a dependent’s educational expenses.
- Emergency Needs – Money required for situations such as: illness, surgery, dental, home repairs and many other unforeseen events.
- Retirement Needs – A stream of income required to replace a lost pension or provide additional monies to support dependents during retirement years.
Term life insurance provides protection for a specified period of time. The face amount (death benefit) of the policy is payable if the insured dies during the specified period, and nothing is paid if the insured survives. The most common term periods are 10, 20 and 30 years. Term insurance is the most cost effective way of providing coverage for a specific period of time.
Whole life insurance is permanent life insurance and provides protection for life. The premiums for whole life are structured to remain level over time. Whole life premiums accumulate a cash value that is dependent on a given insurance company’s investment performance. Cash value generated in a whole life policy can be used for: 1. Cash surrender value 2. Loaning money to self 3. Pay premiums for a given time 4. Supplement retirement income Cash values may be influenced by a life insurance company’s performance based on expenses, mortality experience and overall investment performance.
Universal life insurance is permanent life insurance. As long as premiums are paid, a death benefit is payable to the beneficiary. Introduced in 1979, UL was the first variation of whole life created to offer truly flexible premiums. In UL contracts some of the investment risk is shifted to the policy owner because the premium is based on interest rates in excess of the guaranteed interest rate. This being the case, the policy owner does not have any option to direct the investment portfolio. Two additional features of universal life are: (1) The policy owner’s ability to withdraw part of the cash value and (2) The choice of a level or increasing death benefit design. Universal life insurance policies accumulate cash values on a tax-deferred basis. The cash values are interest-rate sensitive. UL policies are considered flexible because they provide permanent protection and accumulate cash values that can be used for emergencies.
Variable Universal Life
Variable universal life is permanent life insurance. As long as premiums are paid, a death benefit is paid to the beneficiary. VUL policies are the most recently developed life insurance products. They incorporate all the premium flexibility & policy adjustment features of universal life, but allow the policy owner to direct the investment choices. VUL policies offer the policyholders the option of directing their investment choices. VUL policies offer the policy owner a choice among various mutual funds that are maintained by the insurance company itself. The death benefit in a VUL may be increased or decreased, and premiums can also be increased or decreased as well as skipped. In addition, VUL policies may be purchased with a level or increasing death benefit. VUL’s also accumulate cash values on a tax-deferred basis and have potential for a higher rate of return due to the possible investment performance. Unlike universal life, the cash values of VUL’s are not guaranteed. These policies carry more risk than universal life, and they also have a variety of ways the cash value may be used.