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Sound Advice: January 3, 2024

 LIFE INSURANCE EXPLAINED

Life insurance is a contract between an individual (the policyholder) and an insurance company, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. There are several types of life insurance policies, each designed to meet different needs and financial goals. Here are the main types:

  1. Term Life Insurance:

·         Coverage Period: Term life insurance provides coverage for a specific term or period, such as 10, 20 or 30 years.  At a minimum, the level of benefits should be structured for things such as debt retirement, education costs for children, and sufficient funds for the survivor to comfortably manage the daily costs of living.

·         Payment Options: Rising premium or level term.  Unless you specify otherwise, premiums will rise every year.  When you specify level term, the premiums do not change. 

·         Benefit: If the insured person dies within the term, the death benefit is paid out to the beneficiary. If the term expires and the insured person is still alive, there is no payout.

·         Affordability: Term life insurance is generally more affordable than other types of life insurance because it only provides coverage for a limited time.

  1. Whole Life Insurance:

·         Coverage Period: Whole life insurance provides coverage for the entire lifetime of the insured person.

·         Benefit: In addition to the death benefit, whole life insurance policies also have a cash value component that grows (slowly) over time. This cash value can be withdrawn or borrowed against during the policyholder's lifetime.

·         Premiums: Premiums for whole life insurance are usually higher than those for term life insurance, but they remain level throughout the life of the policy.

  1. Universal Life Insurance:

·         Flexibility: Universal life insurance offers flexibility in premium payments and death benefits. Policyholders can adjust their premiums and death benefits within certain limits.

·         Cash Value: Similar to whole life insurance, universal life policies accumulate cash value over time, which can be used to cover premiums or be accessed by the policyholder.

·         Interest Rates: The cash value in universal life policies can earn interest, which is often linked to market rates. There is usually a minimum guaranteed interest rate.

  1. Variable Life Insurance:

·         Investment Component: Variable life insurance allows policyholders to invest the cash value portion in various investment options, such as stocks, bonds or mutual funds.  May sound interesting, but not likely to be worthwhile.

·         Risk and Reward: The cash value and death benefit can fluctuate based on the performance of the chosen investments. There is potential for higher returns, but also higher risks compared to other types of life insurance.

  1. Variable Universal Life Insurance:

·         Combination of Features: Variable universal life insurance combines the features of both universal life insurance and variable life insurance. Policyholders have the flexibility to adjust premiums and death benefits, as well as the ability to invest the cash value in different investment options.

·         Flexibility and Risk: Although it offers flexibility, the policy's cash value and death benefit are subject to market risks due to the investment component.

For most folks, term life insurance will be a better choice.  It’s straightforward, set up to cover essential items for specific periods.  Younger people should select policies that terminate in their 50s or early 60s to increase the likelihood of reasonable cost if a follow-up policy is desired.  Beyond that time, annual premiums will be much more costly.

It's important to carefully consider your financial goals and needs before choosing a life insurance policy. Consulting with a financial adviser or insurance expert can help you make an informed decision based on your specific circumstances.

N. Russell Wayne, CFP

Sound Asset Management Inc.

Weston, CT  06883

 203-895-8877 

www.soundasset.blogspot.com

 

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