Life Insurance: Am I Covered Enough?

Life insurance is a legally binding contract between an individual and an insurance company. The insurance company agrees to pay a sum of money to the policyholder's beneficiaries upon their death in exchange for regular premium payments from the policyholder. The purpose of life insurance is to provide financial security to loved ones after the policyholder's death. There are two main types of life insurance: term life insurance, which covers the policyholder for a fixed term, and permanent life insurance, which covers the policyholder for their entire life.

Whole life insurance

In summary, whole life insurance provides permanent protection, consistent premiums, guaranteed cash value growth, and a tax-free death benefit. It is a good choice for those seeking lifetime coverage and the additional benefits of the cash value component but be aware of the higher costs compared to term life insurance.

Universal life insurance

One of the key features of universal life insurance is its cash value component. This allows the policy to accumulate cash value over time, similar to a savings account. The cash value earns interest, which can be used to increase the death benefit or withdrawn for other purposes, such as emergencies, home repairs, or college tuition. However, it's important to note that if the cash value falls too low, the policy could lapse or require large payments to keep it active.

When choosing between universal life and whole life insurance, it's important to consider their differences. Universal life insurance provides flexible premiums and death benefits, while whole life insurance has fixed premiums and a guaranteed death benefit. Universal life insurance may also be cheaper than whole life coverage, but it's important to carefully weigh the risks and benefits of each option.

Variable universal life insurance

Variable universal life (VUL) insurance is a type of permanent life insurance policy that combines lifelong insurance protection with flexible premiums and a cash value that can be accessed while the policyholder is alive. This cash component can be invested to produce greater returns, with the potential for high growth but also the risk of substantial losses.

VUL insurance policies are similar in structure to traditional universal life insurance policies, but with the added benefit of allowing policyholders to invest the cash value in the market via subaccounts. These subaccounts operate like mutual funds, with exposure to market fluctuations that can generate high returns but may also result in significant losses.

One of the key advantages of VUL insurance is the flexibility it offers in terms of premium payments and investment choices. Policyholders can adjust their premium payments to fit their budget and have control over how to invest their cash value by selecting subaccounts that align with their risk tolerance and investment objectives.

However, it is important to carefully assess the risks before purchasing a VUL policy. Unlike whole life insurance, the investment risk of the cash value is transferred to the policyholder. If the investments perform poorly, the cash value may not grow as expected, and there is a possibility of losing money. In such cases, higher premium payments may be required to maintain the insurance coverage.

VUL insurance is suitable for individuals seeking permanent life insurance with the potential for accumulating cash value, who are comfortable with a higher risk tolerance and prefer to actively manage their investments. It offers enhanced growth potential and the ability to customise policies with optional features, making it a flexible option for those wanting more control over their investment choices.

Term life insurance

There are a few types of term life insurance:

• Fixed Term: This is the most popular choice. It’s the most basic version and lasts 10, 20, or 30 years long. The premiums remain static in this plan.
• Increasing Term: This type of policy allows you to scale up the value of your death benefit throughout the term. Your premiums will slightly increase over time. These policies tend to cost more but usually deliver a larger payout.
• Decreasing Term: This type of insurance reduces the premium payments over time, which can result in a smaller death benefit. This type of insurance makes sense for those who predict they will have fewer financial obligations as they age.
• Annual Renewable: This provides coverage on a yearly basis and must be renewed by the policy end date to continue coverage. The premiums usually increase each time the plan is renewed. This option is best for those in need of short-term coverage.

Many term life insurance policies allow you to convert to a permanent life insurance policy with no additional medical exam. This can be ideal if your financial situation changes and you want to build cash value.

Permanent life insurance

Whole Life Insurance

Whole life insurance is a common type of permanent life insurance. It offers fixed premiums and a cash value component that accumulates slowly. You can choose to pay premiums up to a certain age, for a fixed number of years, or opt for a single-payment policy. When you die, your beneficiaries will typically receive the face amount of the policy. You can also withdraw money or borrow against the cash value during your lifetime. However, if you don't pay back the borrowed amount, the insurer will reduce the life insurance death benefit accordingly.

Universal Life Insurance

Universal life insurance allows you to adjust your premiums and death benefit, giving you flexibility as your financial circumstances change. You can combine the cash value with the death benefit to increase the payout to your beneficiaries, but this will result in higher premiums.

Variable Universal Life Insurance

Variable universal life insurance offers flexible premiums and a savings component. However, more factors influence how the savings can grow, making it a riskier option. The savings portion, or cash value, grows based on the investment methods you choose, and there is usually a minimum and maximum growth rate allowed.

Indexed Universal Life Insurance

Indexed universal life insurance is another type of universal life insurance where the cash value grows based on a chosen stock market index. If the chosen index performs well, the account will grow, and if it doesn't, some companies allow it to grow at a minimum rate.

Frequently asked questions