That is not to say your agent is going to purposely mislead you just to sell you policies. However, you have to keep in mind that he, like anyone else in business is in it to make money. He wants to make the most money with the least amount of risk to the underwriter. Also, as much as you may try, he may not really understand your specific needs and if you aren’t knowledgeable about insurance, you may not choose what’s best either.
Life Insurance:
Life insurance is usually divided into two types: Permanent or Whole Life and Term.
Permanent or Whole Life Insurance
Whole life insurance is often called permanent life insurance
Certain types of life insurance build equity and thus be used just like any other valuable asset. You can borrow against it, use it as collateral or cash it in. There are usually some charges whenever money is borrowed against a policy or when the policy is cancelled. Insurance companies may charge interest and fees to close an account. If cash is taken before the death of the insured only the death benefit is paid to the beneficiary, not the death benefit and the cash value.
Some policies also have an investment feature in which funds accumulate and may be used to pay future premiums or offset the natural premium increase that comes with the insured’s ageing. Here, the difference between the premiums paid and the actual cost of the policy is placed in what is known as a cash-value account. This account grows tax-free. The funds in this account may be used to help pay the fixed premiums in the policy’s later years
Term Life Insurance:
This is truly “pure insurance”. Death benefits are paid only if the insured dies during the term specified in the policy. If the insured lives beyond the term, there are no benefits paid. There are no other benefits associated with term insurance, no investment or cash value feature, therefore the premiums, initially, are must less than those of a similar payout permanent life insurance policy.
The benefit of the lower premiums may be offset by the shortcomings of Term life insurance. The first problem is that once the policy expires and the insured is still living, they will need to replace that policy. Since the age of the insured determines premiums, their new policy will come with substantially higher premium. If they can purchase insurance at any price. If the insured’s health is failing or they are suffering from a serious health problem, insurability becomes a major issue and for some, unattainable. The good news is that some companies offer renewable term policies wherein for an additional premium, the insured can keep a policy in force after the initial term ends. Also, even though the insured is deciding to extend the policy, most insurance companies do not require evidence of good health.
Universal Life:
Very similar to whole life, universal life gives the policy owner the choice of changing the premiums, the death benefit or even both. This type of insurance works well for people who want lifetime coverage but with flexibility. Some of these policies pay the beneficiary both the death benefit and the cash-value account at the death of the insured and some only pay the death benefit.
A Policy owner may decide to double or triple the premiums paid for a year or even two or more years. All that extra money will go in the cash-value account where it will earn at least 3 or 4 percent interest. Other years or maybe after retirement, the policy owner may decide to use money in the cash-value account to pay the premiums for a while . Some universal life policies may pay a higher death benefit while the insured’s children are young, and a lower the death benefit for their children who are grown. There are limits to the changes allowed and one must be careful not to deplete the cash-value account. If this were to happen and the policy owner still wishes to be insured, he will have to buy a new policy. Some
Variable Universal-Life:
This is a special type of universal policy which allows the cash-value account to be invested. These funds can be used to invest in stock funds, bond funds, and other assets much like mutual funds. One of the attractions of such a policy is that it may allow the cash value to grow at rates much than fixed-rate whole-life or universal-life policies. Many variable policies also offer options such a fixed account with a guaranteed interest rate. This rate will be low
One possible negatives to such policies is that these funds may have losses. Another negative is if the returns are low or losses and the policy owner wishes to keep the policy, the premiums will have to be increased.
This type of insurance policy is for people who want lifetime coverage, but who are willing to tolerate risk.
The Bottom Line:
These are the basics of life insurance. This is by no means meant to be the guide by which you choose an insurance policy. Securing the best policy is of the utmost importance as the type and amount of individual policies may have a profound effect on not only the insured’s life, but their beneficiaries as well. Finding a good agent is the most important part of getting the proper insurance and guidance in this very complex and possibly far reaching financial decision. The best advice here may be to deal with the same agent and underwriter with which you insure your home, health and cars.
