Life Insurance Policies – Making the Best Choice

How to Choose Between Term, Variable, Whole and Universal Life

Jul 12, 2009

Life Insurance can Protect Families, Fleur Hupston

Trying to purchase the best life insurance policies can be confusing. Since each person's situation is different, careful research will help in making the right decision.

The choice between whole of life insurance policies, term life insurance or any of the other options available is not about which one is better or worse than the other. Each has its place.

By doing a proper financial needs analysis, life insurance applicants will have a far more accurate idea of exactly how much life insurance to purchase, in what areas and how much they can afford to spend. Another option is to mix and match the various options to better fit in with one's needs.

What is a Universal Life Insurance Policy?

A universal life insurance policy builds on a term life policy with a cash component. Instead of just selecting a specific term and putting 100% of the premium towards the policy, part of the insurance premium payable will go into a cash account. This cash account earns interest as an investment.

As the policy holder gets older, a smaller proportion of the premium goes towards the investment element and a higher proportion towards the risk element. Because it has a cash component, an individual can temporarily stop making payments when cash strapped. Also, one can borrow against the policy in the form of a loan. The disadvantage is that it is more expensive than a term life policy.

It is very important to check whether there are guarantees on the premiums on a universal life policy, otherwise one may be disappointed by the investment returns received when the policy matures.

Term Life Insurance Definition

A term life insurance policy is purchased for a specific time period, 10, 15 or 20 years for example. There is no cash value so term life is usually the best option for a couple with young children who want life cover in case something happens to them, but at the cheapest price.

There are different kinds of term life insurance policies:

Level Term – The premium and death benefit remains the same each year.
Renewable Term Insurance – If the term life insurance is an annual renewable policy, the life cover can be renewed each year without filling out a new application or passing a physical exam. However, the premium is not fixed, and goes up each time the policy is renewed.
Decreasing Term Life Policy – The death benefit decreases each year while the premium remains the same. The policy ends when the death benefit reaches zero.
Increasing Benefits – With this kind of cover the death benefit amount will increase each year and the premiums payable will increase yearly as well.

Whole Life Insurance Policies

Whole life insurance policies will cover a policy holder against death and/or disability until the day he or she dies, as long as the premiums continue to get paid.

The main issue with whole of life policies is how premiums are structured. Like universal life, whole life has a cash value component and in most cases the premium and the death benefit are fixed. The cash value also grows tax-deferred and also typically allows for withdrawals and loans against the policy.

Variable Universal Life Insurance

Variable life insurance is similar to universal life with the exception that the policy holder does not earn a specific rate of interest in a cash-value fund, instead the policy holder can invest this portion of the policy in a variety of different investments, such as mutual funds.

The control is in the hands of the policy holder but this type of policy, although giving certain flexibility to the policy holder, also carries more investment risk. Worst case scenario, the policy holder may be forced to pay additional premiums just to keep the policy in force, if the investment market turns.

Life Insurance Quotes

Be careful when receiving life insurance quotes. One policy may appear to have much lower premiums than another – the reason for this could be that the premiums of one policy are guaranteed while the premiums of another are not. The premiums are likely to be cheaper when there are no guarantees.

Always be sure to read the fine print and all terms and conditions. If there is anything that seems confusing, ask a fully qualified financial planner for advice.