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LIFE INSURANCE TYPES

Term Life

Term Life Insurance is the original type of life insurance and is what is known as a pure protection type policy that doesnt involve cash values and side accounts. Term Life is purchased for a fixed amount of time and can be for a fixed premium or an increasing premium. Terms are generally 5, 10, 15, 20 and 30 years.

Whole Life

Whole life policies were intended to last for the insureds "whole life", however most policies are designed to last until Age 95. They have a larger premium than a Term Life policy and in fact have an underlying Term Policy built in. There are two parts to a whole life policy that benefit the insured. The first is the Cash Value and the second is the Death Benefit. The Cash Value may be withdrawn as long as it exists and under the terms of the policy, the Death Benefit is only paid out upon the the passing of the insured person.

The premium payments made for the Whole Life policy are divided into two parts. Part of the premium pays for the insurance and the rest is added to a side account or cash value account. At a certain point in the insureds life, the cost of the insurance will exceed the amount of the payment. That is when the cash value starts to deplete itself. Whole Life policies are generally guaranteed through the duration of the insureds life unlike Universal or Variable Life policies.

Universal Life

Universal Life is a type of permanent or non-expiring life insurance with an underlying cash value. When a premium payment is made, it is added to a running Cash Value balance of the policy. Each month part of it goes towards the actual cost of insurance (COI). The balance of the separate account accrues interest at a rate determined by how the policy was set up. This is generally a variable type rate based on a stock index such as the S&P 500. The policy might also have a minimum interest percentage that it can earn if its linked index is not performing so well.

This type of Life policy is a variation of the original Whole Life policy. The potential advantage of the universal life policy is in its flexibility and the potential for greater cash value growth if the interest rates offered outperform the insurer's general account (that whole life policy cash value growth is based on).

Variable Life

This type of policy is very much like the Universal Life policy except it uses securities to store the cash value balance. These policies are regulated by the NASD because they essentially use Stock and Mutual fund type investments as their main interest bearing vehicle.

A Variable Life policy has the greatest potential for Gain and Loss of any other type of Life Insurance Policy. You must keep in mind that money placed in securities have the potential for absolute and total loss of underlying value.

HOW TO CHOOSE AND BUY A LIFE POLICY (do's and don'ts)

1. There are only two essential types of Life Insurance

There are term policies, or pure insurance (permanent) coverage. Term Policies are for a specific amount of time and coverage and permanent use a cash balance to store money. Do you need coverage for 10 or 20 years until the kids leave home or do you need it to support your spouse in the case of your untimely demise? If you are getting life insurance to keep food on the table for the kids, then you should consider Term. If you plan on having the policy for an extended period of time, then go for the permanent type.

2. You dont buy life insurance, it is sold to you!

Insurance Agents that sell Life Insurance are extremely motivated individuals. Especially the type of agent that only sells Life Insurance. All insurance companies that write life insurance know that it is the most profitable line of insurance they could possibly sell. Agents make between 40-200% of the first years premium for selling the policy. The company keeps the rest thereafter. Actual policy payouts on life are in the single digit percentage range of all sold policies for Term. With permanent policies, you could pay in many years beyond profitability before they have to pay your beneficiaries.

3. Permanent life is expensive

Life Policies with a built in investment component are substantially more expensive. Many people are attracted to the benefits of these types of policies, but end up purchasing one with a much lower death benefit because of the increased cost. This can leave them uninsured for what their real reason for buying the life was. These types of policies are also illustrated to you based on assumptions of future earnings. Companies and agents that sell life dont often stress that projections of future earnings are complete guesswork and by no means guaranteed.

4. Match the Term of your policy with your actual needs.

If you only need to cover the kids while living at home, buy enough to carry you through until the youngest one is old enough (or future child) to work and carry their own weight.

5. Dont wait too long

As we all age, our general heath tends to decrease and Life Insurance costs increase per year as we get older. The younger you are when you purchase the policy, the lower the rate will be "locked in" at. Dont be afraid to wait a few days, weeks or months to make your decision. Because the purchase of life insurance is a long term commitment that needs to be thought through! However, dont mull your decision over several years.

6. Make sure you get rates from more than one company!

Just like Auto and Home Insurance rates, Life Insurance rates for every type of person vary from one company to the next. Regardless of if you are young, old, healthy or have existing medical conditions, you could get vastly different rates from one company to the next.

7. Never buy Life Insurance only because of a discount on other policies

Just because you get 5-10% off of your auto or home insurance rate doesnt mean its a good idea to purchase a life insurance policy. Auto and home insurance rates change from year to year for every company that offers it. If you have a life policy with that company, statistically you will stay with that same carrier regardless of increases in cost of the other policies you hold with them. This could make you form an unhealthy allegiance with a company that is no longer the best one for your other needs.

8. Never buy Life Insurance as an investment!

Invest your money in accounts that are intended for that purpose. No matter how enticing returns or benefits of interest bearing life policies may seem, you should never purchase life policies with the intent of saving money for the future. Your investment options within these life policies are always going to be a small fraction of those that you would have in a regular investment portfolio. Your ability to withdraw funds from your life policy will also be limited to loans or surrender value (with penalties). The problem with buying Life Insurance too early is that inflation will constantly wear at the buying power of the dollar and your life insurance benefit. In 1970 the cost of a home was 10x less than it is in current dollars. Comparatively, a life policy purchased back then is worth 10x less than it is today. It is not an asset, so it does not increase in value to keep pace with inflation. A life policy purchased 30 years ago might have had a value of $10,000 which seemed like a lot back then, the equivalent of about $100,000 in todays money. Always remember that the face value or death benefit will constantly decrease in buying power over years as time passes.

9. Never associate yourself with someone that tries to sell you life and additionally recruits you to sell life insurance too

In the last few years, companies have emerged that have a sole purpose of selling life and recruiting more people to also sell the product to their friends and family as well as recruit more people under them to do so. This is just a spin off of the classic pyramid scam, but its now a legal way to do it.

10. If you dont need Life Insurance.. Dont buy it!

If you have no kids or there is nobody financially dependent on you, there is no need for you to have life insurance. Also, dont buy life insurance on your kids. If you need to set money aside for them, get a college savings plan or just simply put money in a bank account.

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