The most common, yet least expensive form of life insurance is "term life." The concept is simple: you pay a premium for a predetermined death benefit. If you die before the age specified on the policy, your beneficiary can use the death benefit to pay your final expenses or to replace your income.
Term insurance does not include a cash–value account; its sole function is to pay a death benefit. This policy is tremendously valuable for individuals who cannot afford a cash–value policy and/or does not desire a savings/investment function in their life insurance.
Cash Value
Speaking of cash–value policies, there are several forms of these. Cash–value policies combine term insurance and a savings or investment accumulation vehicle. The policy's savings/investment vehicle may be managed by the insurance company or the policyholder, depending on the policy selected. These policies are excellent for people who understand the importance of a death benefit, but who also want a policy that accumulates value over time.
Whole Life
The valuable functions of this type of life insurance policy are a cash–value account that is low–risk and tax–deferred accumulation. Its premium is fixed and does not change as long as you pay the premium. You also can withdraw funds from this policy.
Variable Life
Like the previous type, this life policy, too, offers low–risk, tax–free investment accumulation. Also, you can borrow from the policy, but beware because the amount of the death benefit your heir will receive may depend on the cash value of the account.
Universal Life
Universal Life provides a low–risk, cash–value account that accumulates tax–deferred. Its cash–value account earns market rates of interest. There is some premium flexibility and you can borrow or withdraw funds from the policy.
Universal Variable Life
Purchasers of this policy like its options and flexibility. Cash–value options are low–risk and tax–deferred. Separate accounts are available for investments in stocks, bonds and other similar opportunities. You can withdraw funds or borrow against the policy's value. Because it likely is tied to securities, this policy has the greatest risk–reward factor of any life insurance option.
Which is Most Valuable?
This is a question with a thousand answers. Some argue that cash value policies offer the biggest return over time. Others believe the sole function of life insurance should be the death benefit–the bigger, the better. Still others believe it is both.
Term life insurance certainly wins the cost battle. It's the least expensive and significant increases in the death benefit are relatively inexpensive. It's pure insurance. Cash–value policies can produce significant returns over time, but are much more expensive. In addition, depending on which policy you choose, there is no guarantee the risk will be worth the reward.
Remember this: Your best choice will match up with your needs, financial situation and the desired death benefit.
When considering your life insurance options, apply this axiom: Something is always better than nothing. If you are not sure which type of policy is right for you, start with a term life policy. At least you'll have some coverage in place that is affordable. Besides, you can always purchase a different policy down the road.
Reference: www.iii.org
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