Last updated on May 16, 2017 at 02:40 pm
Life insurance is not one size fits all. While one type of policy may be right for you now, your needs will likely change over time.
The good news is there are many options. But, how do you know which is best and most effective for you? Educating yourself about the types of life insurance and asking your trusted advisor questions is the best way to make an informed and wise choice. When you do make a decision, your advisor will help you understand the specifics of your policy.
Term life and variable life insurance policies are two of the most common choices. Here is some general information to help you get started.
What is term life insurance?
This is insurance for a specific period of time. If you purchase a term life insurance policy and, unfortunately, pass away during the contract term, the insurance company will pay your beneficiary the amount specified in the contract (subject to the specific terms of the policy). You pay premiums for the entire length of the term and once the term is up, you stop paying premiums and the policy expires.
Factors to Consider
- Term life policies are usually less expensive than whole, universal, or variable life insurance and offer a very specific coverage period — typically in terms of 10, 15, 20, 25, or 30 years.
- There is no cash value component of the policy and premiums do not earn interest or otherwise accumulate. Additionally, having a specific term can also be a drawback. If you have a 20-year term policy and subsequently want to extend it, you may need to undergo proof of insurability. You could be denied additional coverage or may need to renew at a significantly higher premium.
What is variable life insurance?
A variable life insurance policy provides protection to the beneficiary upon the death of the policyholder (again, subject to the terms of the policy). This type of insurance is generally more expensive than term life because it allows you to allocate a portion of the premium dollars to a separate account comprised of various financial instruments and investment funds within the insurance company’s portfolio. Usually, those include stocks, bonds, equity funds, money market funds and bond funds.
Variable life insurance stands out among other permanent life insurance policies because of the flexibility it provides in terms of premiums paid and cash value accumulation. Premiums paid to a variable life insurance policy are not fixed as they are with traditional whole life insurance or term insurance. Instead, they may shift up or down over time, within certain limits, based on the insured’s needs.
Factors to Consider
- Variable life policies offer an opportunity to invest part of the premium cost. These policies combine a permanent life insurance policy with the opportunity to build cash value via investment income. They also have certain tax benefits, such as the ability to utilize cash value on a tax-benefited basis. If you make wise investment decisions, you may be able to take advantage of significant tax-deferred earnings on those investments. You may also be able to access money from a variable life insurance policy via withdrawals or loans, with the cash value and death benefit of the policy debited accordingly. You are still guaranteed the minimum death benefit as long as you keep up with the minimum premium.
- One challenge of variable life insurance is investment risks within the cash value portion of the policy fall completely on the policyholder and not the insurance company. As such, there are no guarantees as to how well the cash value may perform over time, making it difficult to plan for using accumulated earnings in the future. If part of a policy is invested in risky investments, there is the potential for losing a significant amount of money. A drop in account value could mean that you may need to pay additional premiums to keep the contract in force. Additionally, the expenses associated with the investments may be higher than they would be elsewhere.
- Another concern is if the cash value is withdrawn instead of borrowed. In that case you may face tax implications on any realized earnings. Any loans taken out that are not repaid have the potential to decrease the death benefit paid to beneficiaries at the time the insured passes away.
As you can see, the decision is personal – and one based on lifestyle and life situations. Be sure to talk to your advisors before making a final choice. If you’d like to learn more about insurance, Plymouth Rock in NJ has lots of information about protecting other parts of your life.
Ken Bagner is a member of Sobel & Co. LLC. He is a member of the American Institute of Certified Public Accountants and the New Jersey Society of Certified Public Accountants. Plymouth Rock Assurance in NJ is proud to partner with NJCPA to bring you valuable tips for about your financial health. Qualified members of the NJSCPA can receive a discount on their car insurance through Plymouth Rock Assurance New Jersey.