At some point your life you may come to the conclusion that you need to have a life Insurance. Life insurance packages tend to fall into one of three groups. You’ll find term life, whole life, and universal life insurance. Let’s look at them one at a time.
Term Life Insurance
With term life insurance, it’s the simplest to understand and it’s also the least expensive. Term Insurance simply covers you for a fixed period or term. Over the course of that term, you’ll pay a certain amount of money to the insurance company each year or month. We call that money the “premium”. If you happen to die during the term, the person(s) you state as the beneficiary of your policy will receive the benefit of your policy.
So, for example, you might have a 10-year term life policy. That provides a $1,000,000 benefit to your spouse or your children in the event of your death in that 10-year period. To maintain that insurance, you’ll have to pay in some amount each year. Although that premium is locked in for the length of your policy, it does vary a lot from person to person.
The biggest drawback of term policies is that if you live to the end of the term, you walk away with nothing. The policy only covers you for the number of years designated in your agreement at the start of the policy.
Whole Life Insurance
Whole life insurance takes term insurance and gets rid of the “term”. Instead, it combines it with an investment package. Whole life is a lifetime insurance package that offers a benefit upon your death to whoever you choose. Often, a whole life package offers a certain minimum benefit. That benefit might grow over time. This is because a whole life insurance package also features an investment (dividend) component.
Over the years, your policy begins to grow a cash value, which you’ll be able to borrow against later on. You can even choose to receive dividends from that investment part later on. The dividends are usually small unless the insurance package is very large. Some people start using the cash value of the insurance to pay the annual premium. Meaning, they have a policy that lasts for the rest of their life without any annual costs to them.
Universal Life Insurance
The catch for all this is that the monthly or annual premiums. The amount you pay in each month/year are much, much higher than term insurance for the same benefit.
Universal life insurance also lasts a lifetime. It has the capacity to adjust the benefit later on. Universal insurance is actually like whole life. The difference is that you have the capacity to adjust your benefit upwards or downwards later on. This is depending on your changing insurance needs.
However, this comes with a cost. The premiums you pay also adjust with universal life insurance depending on current interest rates. The rates are much closer to the higher whole life rates than the term rates. In fact, universal life insurance rates are sometimes even higher than whole life insurance rates.
Isn’t the investment part of whole and universal life insurance a great benefit? It can be, but you pay a lot for it. Your premiums are going to be much higher than they would be for a term policy.
Another big problem is that the investment part of such policies is almost always slow to grow at first. There are several reasons for that. One big reason is that during the initial years of such policies, some of your premiums are going to pay off the commission of the person who sold you the policy. That money cuts into how much gets contributed to the investment.