Traditional whole or permanent life insurance provides lifelong coverage and includes an investment component known as the “ policy ’ s cash value .” You pay fixed level premiums to the insurance company that are divided into three portions . One part goes to the death benefit ; another part goes to cover the insurer ’ s operating costs ; the remainder goes to the cash value account . The cash value grows over time in a tax-deferred account . You have the option to borrow money against your policy or redeem the policy for cash . If you borrow against your policy and don ’ t repay the loan , you ’ ll reduce your death benefit . If you surrender your policy , you ’ ll forfeit your coverage . Whole life insurance might seem more complicated than term life insurance , but it ’ s actually the simplest type of permanent life insurance to understand : your premium remains the same for as long as you live , the death benefit is guaranteed , and the cash value account grows at a guaranteed rate .
Even if you are receiving group coverage from your employer , ask yourself : Is this group coverage enough for me and my family ? You might want to consider separate life insurance coverage from your employer . But keep in mind that life insurance products for groups are different from those for individuals .
Understanding the main types of life insurance There are two major types of life insurance : term and whole life . Term life insurance is the simplest form of life insurance . It pays only if death occurs during the term of the policy , which is usually from one to 30 years . Most term policies have no other benefits . The two basic types of term life insurance are level term and decreasing term . With level term , the premiums and death benefit remain the same throughout the length of the policy . Level term policies typically last 10 , 20 or 30 years . Your beneficiaries receive a lump sum payment if you die during the policy ’ s terms . If the term ends before you die , your policy expires and you will have a few choices : go without life insurance , purchase a new level term policy , or convert your term policy to a permanent life insurance policy . As the name suggests , with decreasing term , the death benefit drops — usually in one-year increments — over the course of the policy ’ s term , but your premiums remain the same . This type of policy usually lasts between five and 30 years and pays a benefit if you die during that time . Most people purchase decreasing term life insurance to cover a debt such as a mortgage or a business loan . The benefit will pay the balance of your loan in the event of your death . Whole or permanent life insurance pays a death benefit whenever you die , no matter how old you are . Because of the number of variations , it can be a bit confusing to figure out which type might best suit your needs . There are three main types of whole life or permanent life insurance — traditional whole life , universal life , and variable universal life — and there are variations within each type .
In the 1970s and 1980s , life insurance companies introduced two variations on the traditional whole life product — universal life insurance and variable universal life insurance . Universal or adjustable life insurance is more flexible than whole life insurance . If you pass a medical examination , you might be able to increase the death benefit . This type of policy also includes a savings vehicle called a “ cash value account ” that generally earns an interest rate similar to a money market account . Once you have accumulated enough money in your account , you have the option of altering your premium payments . This feature might be helpful if your economic situation changes . But you need to be mindful that if you use up all your savings accumulation , the policy might lapse , and your coverage will end . Speak to your insurance agent before altering your premium payments . Variable life insurance combines a death benefit with a savings account that you can invest in stocks , bonds , and money market mutual funds . The value of your policy might grow more quickly , but you also have more risk . If your investments do not perform well , your cash value and death benefit might decrease . Some policies , however , guarantee that your death benefit will not fall below a minimum level . Variable universal life insurance includes the features of variable and universal life policies . You have the investment risks and rewards characteristic of variable life insurance , combined with the ability to adjust your premiums and death benefit that is characteristic of universal life insurance .
When considering a life insurance plan — for yourself or to supplement your employer ’ s insurance plan — shop around to find the best rates for you and your family . Remember that life insurance is designed to replace your income if you die . A financial planner will be able to help determine the appropriate amount of coverage depending on your age and income . Life insurance should be part of your overall financial plan .
This article is not intended to be financial advice . The promotional content is for informational purposes only ; you should not construe the promotional content as legal , tax , investment , financial or other advice . Please consult your financial advisor regarding your particular financial situation .
Alina Parzianu , CFP
® , MBA , RICP
® is a Financial Planning Specialist at MMBB Financial Services [
www . mmbb . org ]. Prior to joining the MMBB staff , Parizianu spent 14 years in the financial services industry , including as vice president and credit portfolio manager for a major European investment bank in New York . She holds the CFP
® certification , an MBA , and a behavioral financial advice certificate .
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