Life insurance is an item everyone needs in one form or another but which few care to discuss. For anyone who is married or with children, life insurance provides a needed safety net. For homeowners, making sure the mortgage is paid after one’s death can be covered through a life insurance policy.
At one time there were basically two forms of life insurance, whole life and term life. With whole life, premiums, or the amount paid for the policy, remain constant through the life of the policy, as does the death benefit. The policy remains in effect as long as premiums are paid. The added benefit of a whole life policy is the accumulation of cash value. Premiums are invested in an account which the policy owner may borrow against.
Basic term life policies do not accumulate cash value and are not permanent policies. They may run for 5 years or more. After the policy expires, the owner must purchase another policy to obtain a death benefit. Because they do not accumulate cash value, term policy premiums are usually lower for the same death benefit. The new policy can purchased for whatever death benefit the insured desires.
Universal life insurance policies blend the cash accumulation benefits and permanency of a whole life policy with the flexibility of term policies. With universal life insurance policies the death benefit can be changed based on the needs of the insured. The insured can seek a policy with a guaranteed minimum death benefit and increase the benefit as life needs change.
In addition, the premium can be flexible and increase or decrease as needs arise. The insured can set the premium amount based on his or her monthly budget. Cash value accumulation is not tied to a single interest rate. Interest earned on premiums can be based on a variable interest rate and indexed to certain financial markets. Unlike term policies, universal life insurance policies do not expire. As long as premiums are paid, the policy remains in force. This feature, along with the variable death benefit, dispenses with the need to purchase a new policy.