Universal life insurance. This is basically whole life insurance, but with a lower net cost over time and a death benefit that isn’t fixed from the outset. Like whole life policies, universal life policies build cash value with tax deferral, but the death benefit actually depends on three factors: your ability to keep making premium payments, the insurer’s policy charges and the credit rating of the policy.
You have some flexibility with universal life policies: you can vary premium payments. That variance may affect the cash value and the payout, however. Month by month, the insurer is calculating the premiums you pay vis-à-vis the policy cost. Any “excess” premium received (plus interest) gets credited to the cash value and that ultimately determines the death benefit. Should you stop paying the premiums or borrow against the cash value such that the policy doesn’t have enough cash to meet expenses, the insurer can simply cancel the policy. (Some universal life policies do offer no-lapse guarantees.)
Term insurance. Essentially, this is life insurance that you “rent” for X number of years rather than own. Term insurance provides coverage for a set time period (usually 10-30 years). Should you die within that time period, your beneficiaries will receive a death benefit. Both the premium payments and the death benefit on a term policy are fixed from the start.
If you can’t qualify for whole life or universal life, you may be able to qualify for a term policy. When the term is over, you may be offered the option to renew the coverage for another term, or to convert the policy to a form of permanent life insurance.
Term life is cheap, but the trade off comes when the term is up. Just as you don’t build up home equity by renting, you don’t build up cash value by “renting” life insurance. When the term of coverage is over, you usually walk away with nothing for the premiums you have paid.
Variable life insurance. A variable life policy is essentially a whole life policy with a riskier investment component. (Correspondingly, a variable universal life policy is a universal life policy with the same characteristic.) In VL and VUL policies, percentages of the cash reserve in your policy may be directed into investment sub-accounts managed by the insurer. Assets allocated to sub-accounts may optionally be put into equity investments rather than fixed-income investments. So in exchange for the possibility of greater reward (greater cash value), you (and the insurer) assume greater risk. The performance of the sub accounts cannot be guaranteed.
So, which coverage is right for you? Many factors come into play when deciding what type of life insurance will best suit your needs. The best thing to do is speak with a trusted and qualified financial professional who can assist you in looking at all the factors and help you to choose the policy that will work best for you.
Kevin B. Perlberg, CFP®, is principal of Blackhawk Capital Partners. You can reach him at (480) 320-4736, or kevin@blackhawk-capital.com.
This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of United Planners Financial Services. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
