Remember that there are essentially two kinds of life insurance – term and permanent? Term insurance, so the theory goes, is for a temporary insurance need. The policies provide no further benefits once the term expires, and there is no buildup of cash values. Think of it sort of like paying rent: your payments entitle you to live in the apartment, but once the payments stop, you are out on the street. And you have built no equity, even if you have been there for fifty years.
The most popular form of term insurance is level term – this means that the premium amount is fixed. In 2009, 41% of the new individual life policies purchased were term insurance products.
Permanent insurance, or whole life insurance, is the one that provides protection for an insured’s lifetime. It has a savings component, building up cash value that can be used in an emergency, to pay for special goals or to provide retirement income.
There are four types of permanent life insurance policies: traditional whole life, universal life (UL), variable life (VL) and variable universal life (VUL).
Very briefly, here are the basics: the annual premium for a traditional whole life policy stays the same throughout the life of the policy. A universal life policy allows for flexible or varying premium payment amounts, subject to a certain minimum and maximum. With a variable policy, the death benefit and cash value vary according to the performance of the underlying investment portfolio chosen by the policyholder. And variable universal life combines the flexible premium payments of a UL policy with the varied investment options of a VL contract.
One more thing: policies are participating or nonparticipating. A participating policy allows a policyholder to share in the insurance company’s surplus in the form of annual dividends. These dividends represent that portion of the premium not needed by that company for death benefits to beneficiaries. Obviously, then, a nonparticipating policy offers no such dividend possibilities. In 2009, more than 75% of individual life policies purchased were nonparticipating.
Whew! Enough! You may still not be sure what to buy or what you need by way of life insurance, but don’t you feel smarter?