Life Insurance Basics

The most basic insurance is term life insurance. Term Life is pure insurance. When you purchase a term policy, you are buying coverage for a specified period of time. If you die within the specified period, the insurance company will pay your beneficiaries the face value of the policy. Unlike other types of life insurance, term insurance does not accumulate cash value and it is not designed to be there forever. For example, if you purchase a 20 year level term life policy the premium and face amount may be guaranteed for 20 years. However, if you look at the cost of coverage beginning in the 21st year and thereafter, you will find an increasing cost that most individuals will simply not be able to afford to keep.

It is amazing how many people we talk to who do not understand that they won't have any life insurance later in life if they rely solely on term insurance. So who needs term life insurance? If someone has a young family, they may want to provide coverage designed to provide for child care costs, education costs and other costs associated with bringing up children until they are college age. If someone has a mortgage or large loans, they may want a policy to cover the cost of the mortgage for a predefined period of time. If someone is unable to afford the cost of permanent coverage, it is more important that they have enough coverage, so term insurance should be considered for all or part of the life insurance need.

Life insurance can be looked at as a parachute or roof over your head. When most people start out looking for their first home, they rent first and then buy when they are able to. One excellent strategy to consider with life insurance is to first calculate how much you need, then own or buy (permanent insurance) as much as you can afford and rent the rest (term insurance).

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Whole Life Insurance

Whole Life Insurance is a product that offers a guarantee to pay a set benefit at your death in exchange for level lifetime premium payments. In addition to providing a death benefit, whole life insurance builds cash value. The cash value is part of the reason the premiums on a whole life policy generally remain fixed for the duration of the policy. As the cash value within the policy grows, the risk to the insurance company declines. Under current tax laws, cash value in a life insurance policy grows tax deferred. One of the attributes that make whole life policies attractive to some, troubles others. That's the guaranteed return and fixed premiums. To some, this means one less thing to worry about. You know exactly what you'll pay in premiums and exactly what your death benefit will be. To others, this doesn't provide enough flexibility.

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Universal Life Insurance

Universal Life Insurance was designed to provide more flexibility to the policyholder. Like whole life insurance, a portion of each premium pays for the pure cost of insurance. The remainder is invested in the company's general investment portfolio. Most universal life policies pay at least a minimum guaranteed rate of return. Any returns above the guaranteed minimum will vary with the performance of the insurance company portfolio. You don't have control over where these funds are invested. But there is an area where universal life policies offer a great deal of control.

As the policy owner, you can vary the frequency and amount of the premium as you see fit. You can increase or decrease the amount of insurance to suit your changing needs. If your financial situation improves, you can increase your premiums and build up more cash value. Changing the premium or withdrawing part of the cash value within the policy will affect the size of the death benefit and possibly the amount of premium that will be needed to keep the policy in-force. Note that anytime you do increase the face amount you will be expected to provide satisfactory evidence of insurability. Be careful that your policy is designed appropriately and conservatively to ensure that it will meet your needs for life. Often we find policies that are way underfunded. Universal Life policies rely on a significant cash value in future years to offset increasing internal insurance costs. We advise that you review your universal life insurance policy annually to insure that it continues to support the face amount well into the future.

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