Choosing A Permanent Life Insurance Policy
We purchase life insurance based on specific needs
. Some needs can be covered by term. Other needs can last a lifetime and require that we purchase a permanent policy. With so many different types of policies to choose from, the decision can get overwhelming. Reviewing the various types of permanent policies will help us to choose a policy that best meets the needs of our families.Whole life insurance
When purchasing a whole life insurance policy, our premium payments are fixed. The payment will not change as long as the policy is in force. We must continue to make the payments as agreed for the policy to stay active.
The policy pays the death benefit or face amount at the death of the insured, or at age 100, whichever occurs first.
As with all permanent policies, there is a cash value. It grows at a predetermined fixed interest rate, which is usually about 3%.
Universal life insurance
Similar to whole life, the premium payments are fixed. However, premium payments are flexible. This means that if there is enough cash in the cash value portion of the policy to cover our minimum payment, we can skip a payment.
These policies do not mature at age 100, but they will pay the death benefit upon the death of the insured.
Universal life policies also provide a fixed interest rate for the cash value. The rate for most policies is also about 3%.
Variable life insurance
Variable life insurance is similar to whole life insurance in terms of premiums. There are fixed premium payments.
However, this type of policy allows us to choose among a variety of investment choices for the cash value portion of the policy. The insurance company will usually offer a guaranteed rate, as well as mutual funds. Since we are able to choose how to invest, the cash value is not guaranteed. The growth will depend on the selections we make.
While the cash value is not guaranteed, there will usually be a minimum guaranteed death benefit that is paid out to the beneficiaries at the time of the insured's death.
Variable universal life insurance
A variable universal life policy combines the flexibility of universal life with the choice of variable life.
This policy offers flexible premium payments. Payments can be skipped and pulled from the cash value if it is large enough to cover the minimum payment required.
There are also investment options available for the cash value. However, because of both the flexibility of the payments and the wide range of investment options, there is no guaranteed cash value or death benefit. This type of policy requires the most care and attention to ensure that it does not lapse.
Indexed universal life insurance
Some policyholders want flexibility but are unsure of how to invest the cash value, especially in a volatile economy. An indexed universal life policy allows for flexible payments.
While we are unable to choose the investment vehicles used for the cash value, this policy ties the growth of the cash account to a stock market index. If the index increases, the insurance company will adjust the account value up. If the index decreases or stays flat, the account value will not change.
Having the ability to take advantage of all of the ups and none of the downs sounds too good to be true, but there is a catch. The insurance company will put a cap on the amount of the gains that we are able to capture. So, if the market goes up 23%, as it did in 2009, and there is a 10% cap on the policy, the account value increases by only 10%.
Each type of policies has its advantages and disadvantages. It is up to the purchaser to decide which policy best fits the needs that are to be covered.
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