Man is Mortal. That makes life insurance a little unique and interesting, doesn’t it? We purchase things like health insurance, car insurance and home insurance, then hope we never have a need to use them. Life insurance is different because it’s a widely accepted fact that, sooner or later, each one of us will die.
So many choices. When it comes to life insurance, there are many options. You may have heard terms like “whole life insurance,” “term insurance,” or “variable insurance,” but what do they all mean? And what are the differences? Well, first let me point out what they have in common: all life insurance policies provide payment to a beneficiary in the event of your death. Except for that basic tenet, the differences between policies can be major.
Whole life insurance. This type of insurance covers your entire life (not just a portion or a “term” of it). Insurance companies tend to be cautious when selecting their investments, so the benefits could be, potentially, lower than if you invested on your own. Whole life policies also tend to cost more than “term” policies. This is both because they grow what is known as “cash value,” and, after a certain period of time, you will be able to borrow against or withdraw from your whole life benefits.
Term insurance. Rather than covering your whole life, “term” insurance covers a pre-determined portion of your life. If you die within that term, your beneficiaries receive a death benefit. If not, generally, you get nothing. To put it simply, term insurance allows you to purchase more coverage for less money. Basically, you are betting on the probability of your death occurring within that specified “term.”
Variable life insurance. Variable life insurance is a permanent insurance. Unlike whole life insurance, however, variable insurance allows you to invest the cash value of your policy into “subaccounts” (which can include money market funds, bonds or stocks). Variable insurance offers a bit of control, as the value and benefit depend upon the performance of the subaccounts you select. That means there could be significant risk involved, though, since the performance of your subaccounts cannot be guaranteed.
Universal life insurance. With universal insurance, it all comes down to flexibility. It is permanent life insurance that provides access to cash values, which, over time, build up tax-deferred. You can choose the amount of coverage you feel is appropriate, and you retain the ability to increase or decrease that amount as your needs change (subject to minimums and requirements). You also have some flexibility in determining how much of your premium goes toward insurance, and how much is used within the policy’s investment element.
So, which is right for you? Many factors come into play when deciding what type of life insurance will best suit your needs. The best thing to do is speak with a trusted and qualified financial professional who can assist you in looking at all the factors and help you to choose the policy that will work best for you.
About the Independent Financial Advisor
Robert Pagliarini, PhD, CFP®, EA has helped clients across the United States manage, grow, and preserve their wealth for the past 25 years. His goal is to provide comprehensive financial, investment, and tax advice in a way that was honest and ethical. In addition, he is a CFP® Board Ambassador, one of only 50 in the country, and a real fiduciary. In his spare time, he writes personal finance books, finance articles for Forbes and develops email and video financial courses to help educate others. With decades of experience as a financial advisor, the media often calls on him for his expertise. Contact Robert today to learn more about his financial planning services.