There are basically three types of Life insurance, Term insurance, Whole Life insurance, and Universal Life insurance. In each type of insurance there are a lot of different variations but for today we are going to talk about the basic ones and how they work. Let’s start with Term insurance, this is a temporary insurance that has an expiration date of 5 to 30 years and in some case they have 40 year term policies. This type of insurance is a lot cheaper that other types because it has an expiration date. The shorter the expiration date is the cheaper the cost of the insurance. The reason why term insurance is cheaper is because the insurance company is expecting you to outlive the term of the insurance. This type of insurance should be used to supplement a permanent policy to cover short term gaps in coverage. We will discuss this later.
The second type of insurance is whole life insurance. This type of insurance usually goes till age 100 and if you live to age 100, the insurance company will return the face amount to you or the cash value ,typically which every is lower. This type of insurance has some cash value but typically when you die the insurance company keeps the cash value and gives you the face amount. Interest on a Whole Life policy is anywhere from 2% to 6% return and usually is not used as a retirement fund. The cost for the most part is a lot higher than a Term policy because you’re going to get paid if you die before age 100 and if you live past it they still give you the cash value at 100. This is a permanent life insurance plan that is for the most part very costly.
The third type of insurance is a Universal Life policy and there are two basic types. One is a Variable Universal Life policy and the other is an Indexed Universal life policy. The Variable Universal Life policy allows you to have a life insurance policyand invest in a sub account where you can get a better return on your money because you are investing in the stock market through mutual funds or some other type of stock investment. The upside is that if you have a high risk tolerance you could get high market returns on your money. The downside is that you can also lose lots of money in your sub accounts too. If you lose to much money in your Variable Universal policy the insurance company can close down your policy or you might have to pay a higher premium to keep the policy alive. In some case double or triple the amount that you started the policy with.
The hybrid of the VUL is the Index Universal Life Policy. This is a policy that takes the best of both a safe investment and the gains of the stock market. The way this works is that the money is not investing in the stock market it is index through an index like the S & P 500, the Dow Jones, or even the Euro Stock Index. This way if the index is doing well you can earn a return up to 12% to 15% and if the index is losing money you lose absolutely nothing. The insurance companies give you a minimum guaranteed floor of anywhere from 1% to 3% depending on the insurance company you chose. So the bottom lines is that even in a down market like we are in today you would still earn a few percent return on your investment. The trade off is that you’re capped at a 12% or 15% return no matter how high the stock market is doing. This is the trade that you make so that if the stock market is taking heavy losses you lose nothing.
So to sum this all up there is no good or bad type of insurance. Each type of insurance has its pros and cons you just have to use them in the right situations. Again there are many variations of each one of these types of insurance policies and you need to consult an expert on which type of insurance would be right for your situation. We recommend for the most part the IUL because it gives clients a piece of mind that their investments can't lose money and if the stock market is doing well they can participate in the gains of the market.