Life Insurance is not as mystical as it may seem. When you strip away all of the riders you are left with one of four types of policies. These policies are annual renewable term, whole life, universal, and variable universal. These differ in cost and risk and it is important to know what you are looking for.
Annual Renewable Term Insurance is pure insurance. It is a pay as you go type of policy with costs increasing every year. This type of policy is good for a young family, because it allows one to buy a larger policy than a whole life when you have a greater need for coverage and you are still healthy. This would cover such things as your mortgage and children’s education in years where sufficient income is not available to pay for a whole life policy.
Whole Life Insurance is permanent insurance. In other words if you pay your premium you will always have coverage. This type of policy is good for middle aged individuals who have a health issue or want to have burial costs covered. Partners in business can buy whole life policies on each other. After the death of one of the partners, the remaining partner would be able to use this insurance to buy the remainder of the company from the deceased’s estate. The premium on this type of insurance remains the same. A percentage of this premium is put towards its cash value and the rest is put towards the insurance itself. Over time the amount towards its cash value declines and the cost for insurance increased. This is due to the well known fact that getting older puts you at greater risk to shuffle off this mortal coil, kick the bucket, or join the choir invisible. But even as you age the premium doesn’t change.
Universal Life Insurance is a combination of cash value and term insurance. This allows you to contribute at a minimum the cost of insurance and additionally as much cash value as you want to with some coverage limits. You can’t contribute more than a certain percentage of the policies worth in cash value. This allows you to have a greater amount of term, and later in life contribute to cash value as you are able to. Unlike a Whole Life policy the premium is not guaranteed to stay the same. Just as with a Term policy you are subject to any price hikes the
insurance company puts in place. This would be a great policy for those who want to hedge their bet, get an affordable insurance premium, and still be able to build cash value as their income increases.
Variable Universal Life Insurance is similar Universal except that you are responsible for the investment of your cash value. You are given a selection of pseudo mutual funds to invest in. These funds may be stock, bond, or international funds allowing your cash value to participate in the returns or losses of their respective markets. If you or your financial planner (for example Charles T. Shearman CFP of Prospero Financial) is market savvy, this may be the appropriate insurance policy for you.
These are the basis for all life insurance policies. Make sure to carefully examine any policy you are thinking about purchasing. Riders can substantially modify the look of the policy, but the underlying policy is one of these four. Understanding what your policy can do for you or your estate is very important, both when choosing, and when cashing it in.
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