E-Newsletter – Probate & Estate Administration
There are many different types of life insurance policies to choose from. They vary based on cost, benefits, terms and flexibility. Below you will find a general description of the most common types of life insurance policies.
Traditional Whole Life Insurance
Sometimes referred to as permanent or ordinary life insurance, this type provides coverage over your entire lifespan. Generally, you are guaranteed a certain premium payment that will not increase over the life of the policy. The premium paid each month covers the cost and expenses of the insurance while the remaining money is deposited into a cash value account. The amount of money in the cash value account accumulates over time as you make more payments. In whole life insurance policies, you do not have the option of choosing how the money you pay is invested. You can take loans from your cash value account or use it as collateral to borrow against. However, any money that is not repaid lowers the value of the death benefit your beneficiaries will receive.
Term Life Insurance
With term life insurance, you purchase coverage for a limited amount of time, generally one to 30 years. If you do not die during the term, your coverage ends and you will not receive a refund of the premiums you paid. These policies generally cost more if you are older when you purchase them, and unlike traditional whole life insurance, the premiums you pay will increase in regular intervals as you get older. People generally purchase term life insurance policies for periods in their lives when they want additional life insurance coverage. For example, some families purchase them while they have young children to provide extra coverage for them if something were to happen to one or both parents.
Universal Life Insurance
Universal life insurance is a type of permanent life insurance that offers some flexibility to the policy owner. Like traditional whole life insurance and term life insurance, you do not get to choose how the money from your premiums is invested, but you do get to choose when and how much you pay in premiums. With universal life insurance, you are provided with a range of premium choices with a set minimum and maximum amount. From this range, you can choose how much you want to pay and when you want to make your payments, such as monthly or in one lump sum. Your choice of premium and payment schedule will affect the value of your cash value account and death benefit under the policy.
Variable Life Insurance
Variable life insurance policies allow you to choose how to invest the money you pay into them. Generally, these plans will offer you different investment options, known as “subaccounts” and you choose the one that best fits your investment goals and needs. The choices normally range from relative safe investments to more aggressive ones. The subaccounts are then managed by professionals. Variable life insurance policies have a fixed annual premium that you pay while you have the policy. While some policies provide a fixed death benefit, generally money is applied to your death benefit only after you reach a certain set amount in your cash value account.
Variable Universal Life Insurance
This policy offers the most flexibility of all of the life insurance choices, combining the advantages of universal and variable life insurance policies. Like universal life insurance, you choose the amount of the premium and when you will pay the premium from a range of choices provided by the policy. Like variable life insurance, you also get to choose how to invest your money by selecting a subaccount. There is no guaranteed minimum cash value or death benefit for variable life insurance policies. Some policies, however, will guarantee a limited death benefit that is not connected to how your subaccounts perform. Any amount left from your premium after paying administration and insurance costs is applied to your subaccount. Like other life insurance policies, you can take out a loan from the policy, but it will reduce the cash value of the policy and the withdrawals may be taxable.
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