David Lerner Associates: A Primer – Understanding Different Types of Life Insurance
Life insurance is different from most other types of insurance (like health, car and homeowner’s insurance) in at least one key respect: It covers against an event that is certain to occur at some point in time — the policyholder’s death.
For this reason, life insurance should be viewed through a different lens than other insurance — more specifically, as an asset, instead of an expense. Getting the most value out of this asset requires understanding the different types of life insurance that are available in the marketplace, so you can decide which is best for you and your family.
Term vs. Permanent Life Insurance
The first distinction to make is between term life insurance and permanent life insurance. With term insurance, you buy a specific amount of insurance coverage for a specific period of time (or term) at a pre-determined price (or premium). In exchange, you receive a death benefit that’s payable to your heirs when you die, assuming that premium payments are made on time throughout the term of the policy.
Term premiums can usually be paid in a lump sum or on an annual, semi-annual or monthly basis. At the end of the term, you may have the option of renewing the policy, but the premium amount may rise at this time. The cost of term insurance is based on many different variables, including your age, health status, where you live and whether or not you smoke. In generally, the older you are, the more expensive a term policy will be. And if you’re less-healthy and smoke, your policy will also probably be higher.
Permanent life insurance, also sometimes called whole life insurance, is very different from term insurance. A portion of the premium paid for a permanent insurance policy goes into what is essentially an investment account and accumulates as cash value. Meanwhile, the remaining premium goes toward the insurance component that will pay a death benefit to beneficiaries when the insured dies (assuming premiums have been paid on time).
You can withdraw the policy’s cash value, borrow against it or use it to buy more life insurance coverage, which is referred to as buying “paid-up additions.” With different types of permanent policies (for example, variable life, universal life and variable-universal life, or VUL), the cash value can be saved or invested in different ways.
One of the potential benefits of permanent life insurance is that the premium amount will remain the same for the rest of your life, with no future health exams required. As noted above, the premium amount for term insurance can rise at the end of the policy term — perhaps substantially. So a permanent insurance policy may be a good option if you want to permanently lock in coverage at a fixed price for the rest of your life.
Annuities: A Possible Retirement Savings Tool
Annuities are another type of insurance product you might also want to consider. You invest a certain amount of money in the annuity today, and the annuity will make payments to you in the future. These payments can be made in a lump sum or on a monthly, quarterly or annual basis. One of the potential benefits of an annuity is that the money grows on a tax-deferred basis, with earnings (but not contributions) taxed at ordinary income tax rates when you withdraw them.
Many people use annuities as a retirement savings vehicle due to the fact that annuities can provide a fixed amount of guaranteed income for a specified length of time — including the rest of your life, if you choose. Since there are no annual contribution limits with annuities, they may be an attractive retirement savings option if you’re nearing retirement and want to save more than is allowed in qualified plans like IRAs and 401(k)s.
There are two main types of annuities. With a deferred annuity, the money is invested now but payments aren’t made until a date well into the future (like retirement). With an immediate annuity, payments are made soon after the annuity is purchased. So you might buy an immediate annuity if you’re recently retired to lock in an income stream during your retirement.
Within these two categories, there are fixed annuities and variable annuities. A fixed annuity pays out a fixed sum of money on a future date or dates, so you know exactly how much money you will receive and when. With a variable annuity, you invest your money in a selection of sub-accounts, with the income you receive in the future dependent on the performance of your investments.
If you have more questions about life insurance and how to determine which kind of insurance is best for your situation, please contact David Lerner Associates
at 1-800-367-3000.
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities. Member FINRA & SIPC