3 Quick Points to Simplify Life Insurance
By: Tunji Onigbanjo
Tags: Money, Investing, Finance, Insurance, Life

Term Life Insurance

Term life insurance is designed to provide financial protection for a specific period, such as 20 or 30 years. With term life insurance, the premium stays the same for the coverage selected. After the period is finished, the term life insurance policy can be continued but usually at a higher premium.

An example of a term life insurance policy is a healthy 30-year-old male having a 20-year policy with a death benefit of $500,000 for $50 per month. It is important to note that most term life insurance policies expire before a death benefit must be paid, so the overall risk to an insurance company is lower than universal or whole life insurance.

It is also important to note that if your term life insurance policy expires before you die, you will not get your money back at the end of the policy unless you have a return of premium agreement in your policy. As stated earlier, you can also elect to extend the policy, but likely at a higher premium. You may also have the option to convert your policy to universal or whole life insurance.

Universal Life Insurance

Universal life insurance is a permanent life insurance designed to provide lifelong coverage. It is similar in some ways to whole life insurance. Unlike most whole life insurance policies, it is flexible and allows you to raise or lower your premium or death benefit throughout your lifetime. With the premium paid for universal life insurance policies, it splits into two parts. One part covers the insurance cost, and the other part goes into a cash account to be used for savings and/or investments. The policyholder can access money in the cash account while they are still alive.

The 3 types of universal life insurance policies are indexed universal life, guaranteed universal life, and variable universal life.

With indexed universal life, the part of the premium that goes into the cash account is linked to the performance of an index such as the S&P 500 or Dow Jones Industrial Average. There is no downside risks of an indexed universal life policy. For example, let us say a policy has the S&P 500 as its index. In a month, the S&P 500 increases by 6%. The 6% is multiplied by the cash account value, and that value is then added to the cash account. Let us say that the next month, the S&P 500 drops 6%. Nothing is credited to the account in that case. The cash accumulated from the index doing well can assist with reducing the premium an individual has to pay out of pocket.

With guaranteed universal life, the part of the premium that goes into the cash account is linked to a fixed interest rate at the beginning of a policy. The goal of a guaranteed universal life policy is to allow an individual to make consistent payments without having to worry about how the market performs. For example, if the fixed interest rate is 2% per year, that is how much the cash account value will accumulate per year. Guaranteed universal life is considered the least risky type of universal life insurance.

With variable universal life, the part of the premium that goes into the cash account can be invested into mutual funds that you select. There are benefits to being invested in mutual funds due to the possibility of performing better than a stock market index or fixed interest rate. It is also the riskiest form of universal life insurance due to the possibility of a mutual fund significantly underperforming. It is also important to point out that mutual funds have fees that can eat away at any cash you accumulate.

A specific example of a universal life insurance policy is a healthy 30-year-old male having a guaranteed universal life policy with a death benefit of $400,000 and a monthly fee of $400. Half of the $400 goes to covering the cost of the policy while the other half goes into the cash account and will earn 2% per year. Later in life, the healthy male is now 70 years old and wants to increase his face value and premium because he is now a millionaire, but does not need much to live off of and would like to add his grandkids as beneficiaries. The male changes his policy to a death benefit of $800,000 and a monthly fee of $850.

Whole Life Insurance

Whole life insurance is a permanent life insurance designed to provide lifelong coverage. Unlike universal life insurance, whole life insurance does not offer the same flexibility, such as raising or lowering your premium and coverage.

A similarity it does share with universal life insurance is that premiums are splits into two parts, one part covering the cost of the insurance and the other part going into a cash account to be used for savings and/or investments. Also, the cash account can be accessed by the policyholder while they are still alive. The premiums for whole life insurance are typically fixed. Whole life insurance is considered the most traditional form of life insurance.

An example of whole life insurance is a healthy 30-year-old male having a whole life insurance policy with a death benefit of $600,000 and a monthly fee of $600. Since $300 of the fee goes towards the cost of the policy, the male decides to leave $150 in the cash account each month to earn 2% and then invest the other $150 in a mutual fund that tracks the S&P 500.