All About Life Insurance
What are the different types of life insurance?
The main types of life insurance are term, whole, and universal life insurance. Whole and universal life are permanent life insurance products that stay in effect for as long as the policyholder pays the premium. In addition to death benefits, permanent life insurance features the ability to build cash value on a tax deferred basis and serve as an investment vehicle.
How much does life insurance cost?
Life insurance premium costs vary greatly depending on the type of policy, amount of coverage, and the age and health of the insured. Term life insurance carries the lowest premium costs but, in general, all life insurance policies cost relatively less when purchased earlier in life.
When is the best time to buy life insurance?
Usually the best time to buy life insurance is when you are relatively young and healthy, as this will allow you to get a lower premium versus when you are older or in poor health. Another factor to help determine the timing of life insurance purchase is one’s life stage, such as being newly married with a mortgage or starting a family.
Are life insurance death benefits taxable?
Life insurance death benefits, payable to beneficiaries upon the death of the insured, are typically not subject to federal or state income tax. However, any capital gains that have accumulated on a tax deferred basis on the cash value portion of permanent life insurance are subject to federal income tax upon the death of the insured. The tax-free nature of life insurance death benefit is a primary feature that adds value and peace of mind to this type of financial asset.
An insurance premium is the cost of an insurance policy, typically paid on a monthly, semi-annual or annual basis. Premiums reflect the risk-adjusted price for covering a defined risk over a period of time and are based on such factors as the age and health of the insured.
A death benefit is the amount of money a policy pays beneficiaries upon the death of the insured. Death benefits for term policies are a fixed amount stated in the insurance contract. For permanent insurance the death benefit includes the value of any cash value built up within the policy. Any value of unpaid loans taken against the cash value account within the policy would be deducted from the death benefit, however.
Term Life Insurance
Term life insurance provides coverage over a specific period of time, such as 10 or 20 years, and only provides a death benefit during the policy period rather than over the lifetime of the insured. Term life insurance, while less expensive, does not provide the ability to build cash value like permanent life policies.
Whole Life Insurance
Whole life insurance is the traditional type of permanent life insurance with a savings component that accrues with a fixed rate of return on a tax-deferred basis. Whole life insurance lasts the life of the insured as long as premiums payments are maintained. Any outstanding loan amounts made against the cash value of the policy decrease the death benefit paid upon death of the insured. Otherwise, any cash value that has accumulated over the course of the policy is added to the death benefit that is payable to the insured person’s beneficiaries.
Universal Life Insurance
Universal life insurance is permanent life insurance with a cash value that earns interest, as with whole life insurance. What makes universal life insurance different is that it features flexible premiums that can be adjusted over time. Universal life insurance can also offer either a fixed death benefit or one that increases over the course of the insured’s lifetime.
Variable Life Insurance
Variable life insurance is a type of permanent life insurance that builds cash value. The main feature of variable life is that it involves separate accounts that invest in various securities instruments like stocks, bonds, and annuities. Variable life insurance is considered securities contract as it involves investment risk.