When planning your insurance coverage, you should select the type of insurance product and product mix that is appropriate to your needs.  You need to consider:

• The amount of the insurance you need;
• Your cash flow available to pay for coverage
• The duration of the need for coverage: whether it’s permanent or temporary, and
• Your willingness to accept investment risk

These are the major types of life insurance coverage:

1. Term 
2. Whole Life 
3. Universal Life 
4. Variable Life 
5. Variable Universal Life

 

1. Term Insurance

Term insurance has the following characteristics:

• It provides protection for a specified period only.
• You have pure insurance only, there is no savings or investment element.
• It is suitable for temporary needs.  For example, unpaid mortgages or education-fund coverage.
• Generally, the premium increases with age.
• Term insurance is generally less expensive than cash-value insurance for younger, healthier people.

Term insurance is generally recommended:

• When you want to provide a large amount of coverage for dependants and cost is a major factor.
• When the objective is to pay debts at death.  For example, home mortgage and education loans.

2. Whole Life Insurance

Whole life insurance has the following characteristics:

• It provides permanent protection.
• You pay a fixed premium which remains level.
• The policy has a fixed death benefit.
• It includes a ‘savings’ element.  The increase in cash value grows tax-deferred.
• The policyholder has no say in how the savings element is invested by the insurance company; return on the savings element is based on the overall mortality, expense, and investment experience of the company.
• The policy accumulates a cash value from which you can borrow.
• It is suitable for needs that are permanent: When you are considering keeping the insurance throughout your whole life, e.g., to replace income that could be lost in your later years.

Whole life insurance is generally more expensive than term insurance and should be purchased only if it is expected to be held for a long time.

3. Universal Life Insurance

Universal life insurance has the following characteristics:

• This is a combination of term insurance plus a savings component.
• There is a guaranteed minimum interest rate on the savings component.
• It has flexible premium payments (scheduled contributions); the size and frequency of the premium are adjustable.
• The death benefit is flexible: the size of the death benefit can be increased or decreased.
• Loans are available from the policy.
• It includes a savings element.  Cash value is tax-deferred.

Universal life insurance is generally recommended for:

• People who need flexibility as to premiums and death benefit.
• People who have constantly changing family circumstances.

Example: Wife stops working for six months due to the birth of a child.  The insured husband can increase the death benefit without the ‘cost’ of issuing a new insurance policy, assuming he is still insurable.

4. Variable Life

Variable life insurance has the following characteristics:

• It is permanent.
• It has a fixed premium (generally more expensive than whole life).
• Performance risk is transferred from the insurance company to the insured: the policyholder determines how the cash-value element is invested.
• There is no guaranteed minimum cash value; the performance of the cash value depends on the individual sub-accounts selected.
• The death benefit varies with investment performance but cannot be less than the original face amount.
• Variable Life products are long-term investments that may be appropriate for retirement planning.
• Investment in a Variable product may include substantial fees including mortality, expense, and administrative fees.  There may also be fees for additional riders and underlying investment options.
• Loans may be available from the policy.

Variable life insurance is generally recommended for:

• People who wish to control how their funds are being invested.
• People who are comfortable with taking the risk of the investment performance.

 5. Variable Universal Life

Variable universal life insurance has the following characteristics:

• Has the features of universal life but the policyholder determines how the savings element is invested.
• Variable Life products are long-term investments that may be appropriate for retirement planning.
• Investment in a Variable product may include substantial fees including mortality, expense, and administrative fees.  There may also be fees for additional riders and underlying investment options.

Variable universal life insurance is generally recommended for:

•  Individuals who need flexibility and who are willing to assume ‘investment risk’ in the policy.