Life insurance basics, Part 2
- By Milt x_Zall
- Jan 25, 2001
Last week, I discussed the importance of life insurance and how to determine
how much insurance you need, and I provided a brief description of the types
of life insurance. This week, we'll delve more deeply into the types of
life insurance and discuss the advantages and disadvantages of each.
What are the types of permanent insurance?
Whole life, or ordinary life, is the most common type of permanent insurance.
The premiums generally remain constant over the life of the policy and must
be paid periodically in the amount indicated in the policy.
Universal life, or adjustable life, allows you to pay premiums at any
time, in virtually any amount, subject to certain minimums or maximums.
You also can reduce or increase the death benefit more easily than under
a traditional whole life policy. To increase your death benefit, the insurance
company usually requires you to furnish evidence of your continued good
health.
Variable life provides death benefits and cash values that vary with
the performance of a portfolio of investments. You can allocate your premiums
among investments offering varying degrees of risk and reward—stocks,
bonds, combinations of both or accounts that guarantee interest and principal.
The cash value of a variable life policy is not guaranteed, and the
policyholder bears the risk. However, by choosing among the available fund
options, you can allocate assets to meet your objectives and risk tolerance.
Good investment performance will lead to higher cash values and death benefits.
If the specified investments perform poorly, cash values and benefits will
drop. Some policies guarantee that death benefits cannot fall below a minimum
level. There are both universal life and whole life versions of variable
life.
What are the advantages and disadvantages of term and permanent
insurance?
The following points can help you determine which type of insurance
best suits your needs.
Term insurance
- Advantages: Initial premiums generally are lower than those
for permanent insurance, allowing you to buy higher levels of coverage at
a younger age when the need for protection often is greatest. It's good
for covering needs that will disappear in time, such as mortgages or car
loans.
- Disadvantages: Premiums increase as you grow older. Coverage
may terminate at the end of the term or become too expensive to continue.
The policy generally doesn't offer cash value or paid-up insurance.
Permanent insurance
- Advantages: As long as the premiums are paid, protection is
guaranteed for life. Premium costs can be fixed or flexible to meet personal
financial needs. The policy accumulates a cash value against which you can
borrow. (Loans must be paid back with interest or your beneficiaries will
receive a reduced death benefit.) You can borrow against the policy's cash
value to pay premiums or use the cash value to provide paid-up insurance.
The policy's cash value can be surrendered—in whole or in part—for cash,or
it can be converted into an annuity. (An annuity is an insurance product
that provides an income for your lifetime or a specified period.) A provision
or "rider" can be added to a policy that gives you the option to purchase
additional insurance without taking a medical exam or having to furnish
evidence of insurability.
- Disadvantages: Premium levels may make it difficult to buy
enough protection. It may be more costly than term insurance if you don't
keep it long enough.
Zall, Bureaucratus columnist and a retired federal employee, is a freelance
writer based in Silver Spring, Md. He specializes in taxes, investing, business
and government workplace issues. He is a certified internal auditor and
a registered investment adviser. He can be reached at miltzall@starpower.net.