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Choosing between term and universal life insurance plans can be confusing. Only with some research and planning can a responsible choice be made.
Do You Even Need Life Insurance?
Before deciding between term and universal coverage, consumers need to determine whether or not life insurance is actually needed.
When you come right down to it, it's a matter of money -- if death would cause a financial burden for the family, then life insurance is critical. Financial matters to be considered include funeral costs, college tuition, and all outstanding and upcoming debts. For single people without children or dependents, life insurance is really optional.
Once you've made the decision to buy life insurance, then it's time to determine which kind of policy is right. This is when you need a reputable insurance agent, referred to you by someone you trust. The agent can help you deal with the details of the various benefits and costs of multiple policy types.
Term Life
Term life insurance policies are among the most flexible and economical types of life insurance coverage available. These policies are designed for those who want basic coverage for a set time period without a savings account built in. This means that there will be no return on the money paid into the policy over the years.
Premium rates for a term life policy vary with the policy. Policies are usually purchased for 10, 15, 20, 25 or 30-year periods, and they may be renewable. Apart from low rates, the variety of term periods is one of the most appealing features.
For instance, a couple with a child entering college who want to ensure that tuition will be paid for in the event of their death, can purchase a term life policy for just those years. There is no reason to purchase a lifetime policy for a short-term need. Term policies with increasing or decreasing coverage are also available.
A disadvantage of term life policies is the inconsistency of their rates. While premium rates start out very low, they usually rise as policyholders age. Also, policyholders who want to renew after the initial term has ended, may find the renewal fees prohibitive.
Universal Life Insurance
Universal life insurance policies will pay any necessary death benefits, but also provide policyholders with an additional tax-deferred savings account advantage. Generally these policies must be held for a minimum of 15 years before resulting in any return from the savings account. They provide policyholders with a stable long-term investment that can be borrowed against or cashed out.
The premium rates and coverage provided by universal life policies remain constant throughout the years. Premium rates tend to be higher than with other policies, largely due to agent commissions, but under some plans the rates drop as the policyholder ages and may even disappear altogether. Unless the policy lapses, there are no renewal fees to contend with.
While some financial experts argue that there are better investment options available for educated consumers, many recognize universal life policies as having sound investment benefits.
Suicide Clause: A life insurance policy will not disburse a death benefit if the owner of the policy commits suicide within the initial two years after purchasing the policy.
Surrender Charge: If you cancel an annuity or life policy ahead of time, the company may subtract a fee from the sum it owes you.
TAMRA: Technical and Miscellaneous Revenue Act. A 1988 Federal law that formed a new category of life insurance contracts. The contracts' policy loans and surrender costs are subject to taxation regulations comparable to deferred annuities.
Term Life: The most basic form of life insurance, it normally offers no cash value element. You pay a premium and the company guarantees to pay your beneficiary if you pass away. The policy lasts for a particular length of time or "term," such as 1, 5, 10, 15 or some odd years, or to an elected age like 65 or 100. If you are still alive at the close of the term, the policy terminates unless the company concurs to restore it. Renewal premiums are dependent on your current age. Sometimes called “temporary insurance.”
Underwriting: The insurance company's procedure for deciding whom it will insure. An underwriter's verdict may be based on your application, physical exam, health records, and other information to conclude whether you meet the company's standard.
Universal Life: A flexible-premium life insurance contract which accrues values and pays a death benefit. You select the policy's premium and face total and you can alter these permitting the policy is in effect. It is feasible that the cash value will produce more than the guaranteed lowest interest rate. It is also feasible that the cash value will develop more rapidly than is necessary to cover the price of insurance.
Vanishing Premium: An insurance company's prediction on an illustration signifying that your policy could accomplish a position where you would not have to pay premium payments because the policy would have sufficient cash value to encompass the premiums.
Variable Life: A sort of whole life insurance in which the face quantity and cash value count directly on the investment performance of a particular fund. Reserves are put in investment accounts that are disconnected from the company's universal account. Most policies promise a lowest face sum, but a cash value minimum is hardly ever guaranteed.
Viatical Settlement: A concurrence to sell the rights of your life insurance policy to a different, unrelated person who becomes both the possessor and beneficiary of the policy.
Waiver of Premium: A stipulation that postpones your duty to pay premiums when you are immobilized or you meet some other policy prerequisite. This is a frequent feature in life insurance polices.
Whole Life: Life insurance with a savings aspect. Premiums normally are the same (rank) annually. When you are youthful, your premiums are more than the price of insuring your life at that point in time. The surplus amount builds up and resembles a savings account, called “cash value.” This surplus is utilized by the company to insure you in the future, when your level premium is not sufficient enough to cover you.