You have decided to take out a life insurance policy, now you just need to choose the right one for you. Here we outline the main types of coverage, depending on your goals and expectations.
Term Life Insurance
These policies can provide affordable coverage for a specific death benefit for a predetermined period, typically 5 to 30 years (or to a certain age, such as 65); it should be considered in a limited temporary coverage strategy, such as in the case of parents who want to protect their children until they become adults. Term life policies, because they are usually less complex than permanent policies, are less expensive. On the other hand, the only weak point is in the case of survival to their natural term; unless it is a term policy with return of premium, you receive nothing against the payment of all premiums made. Having come to a temporary end, and exhausted the task of giving finalized coverage for certain purposes, however, these policies can be converted into permanent policies, such as whole life or universal insurance. It is worth discussing this with a financial advisor, however, to better understand the costs and terms involved in these policies, which can differ greatly from company to company.
Permanent Life Insurance
Included under this category are whole life and universal life policies, which are more expensive types of life insurance than term life insurance but can offer greater benefits. Because they have no defined term, permanent life policies accumulate cash value over time, causing a portion of the premiums to grow tax-deferred; in this way, they approach typical financial products. As the cash value grows – at different rates, depending on the type of policy – the advantage is that you can take out loans or make partial withdrawals. The downside is to see your financial benefit significantly reduced if death occurs before you have replenished the cash value. So, in summary: the policy with cash value reimbursement will generally cost more than the equivalent policy without cash value, but the game may be worth the candle should you decide to take advantage of the potential benefits.
Whole Life Insurance
The Insurer guarantees the benefit (Capital or Annuity) to the Beneficiary in the event of the death of the Insured at any time. The expiry date of the contract coincides with the “Whole Life” of the Insured. The premium paid is, after deducting costs, set aside by the Company in a fund managed by the same. The management generates returns which, for the most part, flow into the contract and determine the benefit of the Insurer in the event of the death of the Insured. Unlike the Temporary Death Case, the premiums paid are not entirely “non-refundable”. Often this type of contract provides for the payment of premiums for a certain number of years, but the guarantee is valid for life.
Annual premium = $ 7000.00 to be paid for 10 years
Insured Capital “In Case of Death” = $ 100.000
The underwriter will pay for 10 years $ 7000,00, but the “In Case of Death” guarantee of the Insured will be operative from the moment of the stipulation of the contract (or after the eventual gap period) and for the whole life of the Insured. The benefit of $100,000.00 is payable by the Insurer at any time the Insured should pass away, either in the first 10 years or thereafter. In addition (usually after the third year) it is possible to ask for the redemption of the sums paid or the reduction of the contract. This is made possible by the fact that the Company annually sets aside, after deducting costs, a large part of the premium in an internal fund or in a separate management and from the management obtains returns which are partly paid back to the Policyholder. This mechanism allows, through the management of the Company, the constitution of a capital which after 10 years, as in the example, will be equal to the benefit due by the Insurer.
Universal Life Insurance
This is permanent insurance coverage that accumulates cash value and offers investment options. It is usually offered with the ability to pay flexible premiums, although they affect the cash value and death benefit. Precisely because of the possibilities it is able to offer, universal life is more complex, and is aimed primarily at those who deal consciously with financial investments. With a Variable universal policy, the cash value is tied to a variety of investment options. If you opt for an Indexed universal policy, you accumulate cash value based on the performance of certain predetermined indexes, making it less expensive and risky than Variable universal life because there is no actual investment in an index.