Life Insurance Options

Life insurance can be a central part of estate planning, particularly if you are the parent of young children or a disabled child. An insurance policy is meant to provide money for the beneficiaries after a premature death of the policyholder.  An insurance policy can supplement lost earned income for a person that does not receive regular income or money from investments/other assets.  Below is an overview of available life insurance options.

Term Life Insurance

ProsCons
  • It is relatively inexpensive
  • Various policy terms of coverage are available
  • It is subject to cancellation
  • Premiums become more expensive as the policyholder ages

This type of policy provides coverage for a particular amount of time that is stated within the policy.  Term life insurance is the least costly kind of insurance, due to it only covering a specific period and only premium only paying for the policy.  The terms of the coverage can range for a certain set amount of years, like 5, 15, or 25 years.  Once this set term ends, the policyholder will have the choice to renew the policy for additional years beyond the original time period.  However, at this point, the premium will normally increase after every renewal.  Different insurance companies offer policyholders various options under term life policies.  Some options may be:

  • Renewed: A policyholder can continue his or her coverage by renewing coverage for another term and paying a new premium price.
  • Converted: During the policy term, the policyholder changes the policy from term life to permanent life.

A term life insurance policy can be beneficial to person with temporary expenses or a person with young children; however, is may not be appropriate for all policyholders.  For example, a term insurance policy will not be beneficial to a person who is living on retirement money or off of investments.

Permanent Life Insurance

ProsCons
  • It is not subject to cancellation unless the premium is not paid
  • It endures for the life of the policyholder
  • It is a type of investment
  • It is expensive
  • Commissions and fees may be high
  • Policies are complex

Because the policy is effective during the policyholder’s entire life and the excess that is paid into the policy is invested, permanent life insurance is more expensive than a term life insurance policy.  With this option, the premium paid normally stays the same throughout the policies lifespan.  Any excess that is accumulated from the premium will produce interest or dividends; with the policyholder receiving some of the return.  A policyholder has a few choices in this case: he or she can terminate the policy and accept any cash surrender value, borrow against the cash value, or apply the investment income to the reserves.

Under federal tax law, growth in the value of the reserve is tax deferred (unless a policyholder receives the money).  However, in some circumstances, partial withdrawal can escape tax liabilities.

The following are the various types of permanent life insurance options:

Whole Life Insurance

Whole life insurance gives a policyholder lifelong coverage, provided they continually pay the fixed premium.  Generally, the younger one is when starting their coverage the less the annual premium will cost them.  As one pays into the policy, the cash reserve will continue to build.  The policyholder will be able to borrow from the cash reserve at the current policy loan interest or rate or end the policy and receive the cash value of the policy.

Universal Life Insurance

A universal life insurance policy is flexible and has the potential for accumulation of investment income. Some of the benefits of a universal life insurance are:

  • You may change the amount of the life insurance
  • Can adjust the premium payments and death benefits (within the limitations of the policy)
  • Account value earns tax-deferred interest
  • Net cost of the policy is less than whole life insurance
  • May withdraw or borrow money from the cash reserve

Variable Life Insurance

Variable life policies allow a policyholder to invest cash reserves into securities, bonds, and stocks. The policyholder bears some of the risk, however the insurance company guarantees a certain return on the investment.  The death benefits will depend on the investments’ performance.

Variable Universal Life Insurance

Variable universal life insurance is a combination of the flexibility of universal life insurance and variable life insurance’s investment strategy/risk factor.

Single Premium Life Insurance

A policyholder of single premium life insurance pays the entire premium amount up-front in one payment. The benefits include the elimination of the possibility of cancellation, immediate accumulation of cash value, , and distribution of tax-free proceeds to the beneficiaries.

Survivorship Life Insurance

Also known as “second to die” insurance, survivorship life insurance is a single policy that insures two people, normally spouses, for one insurance benefit. When the first person on the policy passes away, the survivor will continue to make premium payments. After the survivor passes away the insurance company will then pay the beneficiaries.

This policy may be appropriate for people with non-liquid assets (such as a family business) or wealthy couples that expect large estate taxes.  Under a survivorship life insurance policy, proceeds from the policy may be used to buyout an ownership interest.

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