Life Insurance

There are many types of life insurance to fit individual needs and circumstance. The following are some of the basic types of life insurance available.

Term insurance

This is the simplest form of insurance. You purchase coverage for a specific price for a specified period. If you die during that time, your beneficiary receives the value of the policy. There is no investment component.

Whole life

Similar to term, but you purchase the policy to cover your "whole life" not just a set period. Premiums remain level throughout the life of the policy, and the company invests at least a portion of your premiums. Some firms share investment proceeds with policyholders in the form of a dividend. Many companies will offer "a relatively low guaranteed rate of return," but in reality pay at a rate in excess of the guarantee.

Universal life

You decide how much you want to put in over and above a minimum premium. The company chooses the investment vehicle, which is generally restricted to bonds and mortgages. The investment and the returns go into a cash-value account, which you can use against premiums or allow to build. With some policies, sometimes called Type I or Type A, the cash account goes toward the face value of the policy on the death of the policyholder. With a second variety, sometimes called Type II or Type B, the beneficiary receives the face value of the policy plus all or most of the cash account. While Type II is meant to provide a partial hedge against inflation, it demands higher premiums as you get older than Type I.

A variation of a universal policy, often called universal variable life, allows policyholders to choose investment vehicles.

Variable life

With a variable policy, there is usually a wider selection of investment products, including stock funds. As with a universal policy, returns on investments can offset the cost of premiums or build in the account. And depending on the type of policy, the beneficiaries will either receive the face value of the policy or the face value plus all or part of the cash account.

Reasons you may want to consider life insurance?

In addition to the comfort of knowing that you have provided for your loved ones after your death, there are several other reasons you may want to consider life insurance, including:

• If your policy has cash value, the cash value may be used to help with big-ticket items such as college education or a down payment on a home. Most cash-value policies enjoy a tax-deferred status, meaning that you do not pay taxes on any cash value accumulation until you receive funds from the policy.
• Life insurance can be used to pay estate taxes and funeral expenses. If an individual dies in 2004 and his or her estate is worth more than $1,500,000, federal estate taxes at rates as high as 48% may be payable, usually due within nine months of death. So, even if you have a substantial sum of money, life insurance can be a benefit. The proceeds usually go directly to your beneficiaries without going through the probate process.