A life insurance policy is a contract with an insurance company. A permanent life insurance is designed to provide lifetime coverage. Premiums or Payments are typically fixed and it has a cash value which functions as a savings component and may accumulate tax-deferred over time. It's important to note that death benefits from all types of life insurance are generally income tax-free.
Universal life insurance
Universal life insurance is another type of permanent life insurance designed to provide lifetime coverage. Unlike whole life insurance, universal life insurance policies are flexible and may allow you to raise or lower your premium or coverage amounts throughout your lifetime. Like whole life insurance, universal life also has a tax-deferred savings component, which may build wealth over time. Additionally, due to its lifetime coverage, universal life typically has higher premiums than term.
Universal life insurance is most often used as a flexible estate planning strategy to help preserve wealth to be transferred to beneficiaries. Another common use is long term income replacement, where the need extends beyond working years. Some universal life insurance product designs focus on providing both death benefit coverage and building cash value while others focus on providing guaranteed death benefit coverage.
Whole life insurance
Whole life insurance is a type of permanent life insurance designed to provide lifetime coverage. Because of the lifetime coverage period, whole life usually has higher premiums than term life. Policy premiums are typically fixed, and, unlike term, whole life has a cash value, which functions as a savings component and may accumulate tax-deferred over time.
In addition to providing lifetime coverage, whole life is commonly used to accumulate tax-deferred savings. Whole life can also be used as an estate planning tool to help preserve the wealth you plan to transfer to your beneficiaries.
Term life insurance
Term life insurance generally provides protection for a set period of time, while permanent insurance, such as whole and indexed universal life and universal life, provides lifetime coverage.
Typically, premiums are level and guaranteed for that time only. After that period, policies may offer continued coverage, usually at a substantially higher premium rate. Term life insurance is generally a less costly option than permanent life insurance.
Term life insurance proceeds are most often used to replace lost potential income during working years. This can provide a general safety net for your beneficiaries and can also help ensure the family's financial goals will still be met—goals like paying off a mortgage, keeping a business running, and paying for college.
It's important to note that, although term life can be used to replace lost potential income, life insurance benefits are paid at one time in a lump sum, not in regular payments like paychecks.
Indexed Universal Life Insurance
Indexed universal life insurance is a permanent life insurance that gives the policy holder the opportunity to allocate cash value amounts to either a fixed account or an equity index account. This policy is seen as a "hybrid" policy and usually not very costly. It is safer than an average variable universal life insurance policy.
Indexed policies offer a variety of popular indexes to choose from, such as the S&P 500 and the Nasdaq 100. Indexed policies allow policy holders to decide the percentage of their funds that they wish to allocate to fixed and indexed portions. Also, these types of universal insurance policies typically guarantee the principal amount in the indexed portion, but cap the maximum return that a policy holder can receive in said account.
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** Some of the Information on this site has been derived from different resources such as the National Financial Planning Association, Securities and Exchange and Commission, Department of Insurance and Investopedia
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