There are two major categories of life insurance policies: term life and permanent (cash value) life insurance. Within the two broad categories are many types of policies that have been developed over the years in response to consumer demand, market conditions, and changes in the tax laws.
Term Life Insurance
Term life insurance (also called pure insurance) policies provide life insurance protection for a specific period of time or term. If you die during the coverage period, the beneficiary named in your policy receives the policy death benefit. If you don’t die during the term, your beneficiary receives nothing. At the end of the coverage period, you must either renew your coverage or apply for a new policy. Term life insurance is often compared to automobile insurance: You must renew it at the end of every coverage period. If you get into an accident, you collect on the policy, but if you don’t have a claim, you don’t get your money back. Term insurance is available for different time periods ranging from one year to many years.
Permanent (Cash Value) Life Insurance Policies
When you buy permanent insurance, the policy provides insurance protection for your entire life as long as the policy remains in force (meaning the premiums have been paid and the policy hasn’t lapsed or been canceled). In addition to the insurance protection provided by permanent life insurance, these types of insurance policies also build internal cash values.
Caution: Guarantees are subject to the claims-paying ability of the insurer.
Caution: Variable life insurance and variable universal life insurance policies are offered by prospectus, which you can obtain from your financial professional or the insurance company. The prospectus contains detailed information about investment objectives, risks, charges, and expenses. You should read the prospectus and consider this information carefully before purchasing a variable life or variable universal life insurance policy.
Cash Value Life Insurance Covering One Life
|Policy||Premium Characteristics||Cash Value Characteristic|
|Whole Life||Fixed, Level||Guaranteed rate|
|Fixed, Level||Guaranteed Interest|
|Fixed, level with shorter|
|Current Assumption Whole Life||Premium may change, Guaranteed max||May change. Guaranteed min. |
|Variable Life||Fixed, Level||Returns based on investment performance.|
|Adjustable Life||Can be adjusted by |
|Balance varies depending on premium payments.|
Guaranteed min. interest
|Universal Life||Flexible at option of |
|Balance varies depending on premium|
payments. Guaranteed minimum interest
|Flexible at option of|
|Balance varies depending on premium|
payments. Returns based on investment
performance. Not guaranteed
Policy Types Subject to Special Tax Rules
Congress has enacted certain tax laws to limit the use of life insurance policies as tax-preferred investment vehicles. When a policy fails to meet certain insurance definitions and criteria, access to the cash value may be subject to unfavorable tax treatment and penalties.
If the policy fails to meet those definitions and criteria the policy becomes a Modified Endowment Contract (MEC). This is when the policy is excessively funded in the early years and exceeds the amount allowed to keep the full tax treatment of a cash value policy.
Any cash loans and withdrawals will be subject to unfavorable tax treatment and penalties.
We believe life insurance policies are the cornerstone of any financial plan. However, there are a variety of ways to structure an insurance policy. No two policy structures are the same. Each one should be tailored to the clients’ needs and should be in line with their financial goals. Please consult with a licensed life agent to see what policy is right for you. Or, click the link below to schedule your no-obligation consultation.