finance

Life Insurance Basics

Written by: Penny Anthem Staff

Deciding what, if any, type of life insurance is best for your situation, is a conversation you should have with you financial advisor. Each situation is different and different companies offer different policies each with there own nuances. However, below is general information on the different types of policies.

Term- you have it for a designated amount of time

level term: Consistent death benefit but policy only lasts for a designated amount of time. You cannot borrow cash from the policy. If the insured dies while the policy is in effect the beneficiaries receive a payout. If the insured dies after the policy is no longer in effect, the beneficiaries will no longer receive the payout.

Decreasing term: Death benefit drops over the course of the policy until it is $0 and the policy is no longer in effect. This policy is sometimes used if the insured has debt/mortgage they are paying off. One might have a 20 year team decreasing policy and a 20 year mortgage.

Group term: Some employers offer group term policies. These typically cover an employee while they work for a company, once the employee is no longer employed- they are typically no longer covered. These policies do not have cash value (you cannot borrow money from the policy)

Whole life- permanent life insurance

Death benefit is usually consistent throughout policy and payment (also known as premium) is usually consistent throughout policy. Once the insured dies, the beneficiaries receives death benefit.

When the premium payment is made it gets split into 2 areas. A portion goes to the cost of insurance and the other goes to the cash value. permanent policies usually accrue cash value, meaning you can borrow from the policy or surrender it for money. Keep in mind that borrowing cash from your policy may result in a tax implication.

For example: Client A pays $500 monthly until the policy is paid up, when client A dies his beneficiaries get $1,000,000.

Client A could have borrowed money from the cash value during his life. He would have to have paid taxes as well as pay it back or the amount he borrowed would be subtracted from the death benefit.

Universal Life- flexible permanent life insurance

These types of policies are similar to whole life except they offer a little more flexibility of payments. The owner can pay more/ less into the policy within certain confines. So long as at the minimum premium is being paid the policy should stay in effect. Any extra cash paid may go into the cash value portion (able to be borrowed).

Variable Life- permanent life insurance with investment component

A variable life policy is by far the most nuanced. The premiums paid into this type of policy get split between the cost of insurance and the cash value portion can be invested in sub accounts. These sub accounts are similar to mutual funds in that they can grow or lose value with the stock market.

The death benefit in these types of policies can increase or decrease depending on how much you pay and how the market performs.

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