Permanent Life Insurance & Consumers' Legal Options
A consumer can purchase life insurance as term insurance, which means that the policy lasts for a certain period, or as permanent insurance, which provides lifelong protection. Permanent insurance comes in several forms, most notably whole life insurance and universal life insurance. Each of them has certain distinctive features. The right choice for a consumer may depend on their financial situation and their stage in life.
Whole Life Insurance
In return for uniform payments on a regular basis, whole life insurance offers coverage in a set dollar amount. You will pay higher premiums than would be statistically justified in the early stages of the policy, when you are less likely to die. However, since the premiums remain steady throughout your life, you may end up paying lower premiums than would be statistically justified later in your life. From part of the surplus accumulated during the early stages of the policy, the insurance company will compile a cash reserve that will be allocated to fixed-income investments. The consumer can borrow against the cash reserve after a certain period, set by the policy. (Another part of the surplus is allocated to the commission for the insurance agent.)
While the policy will not expire, a consumer retains the right to cancel it. This will allow them to receive its cash surrender value. Most people who are relatively young and early in their careers will not find whole life insurance policies worthwhile and will struggle to keep up with paying the premiums while also supporting a family.
Universal Life Insurance
This type of life insurance tends to be less expensive than whole life insurance in the long term. It offers greater flexibility as well. Instead of paying a fixed amount that remains uniform, a consumer can change the amount that they pay for premiums each year, as well as the scope of their coverage. Universal life insurance policies parallel whole life insurance policies in accumulating a cash reserve. They can be viewed as a hybrid between term policies and whole life insurance policies. As an additional advantage, they tend to come with a more thorough explanation from the insurance company of how they operate. The insurer will tell the consumer how much of a payment goes toward their cash reserve, as opposed to overhead expenses for the insurer.
Variable Life Insurance
Some life insurance policies involve investing cash reserves in securities, similar to a mutual fund. A consumer will not receive a guaranteed return but instead will receive an amount that depends on how the selected stocks and bonds perform. The risk in a variable life insurance policy is greater than the risk in a whole or universal life insurance policy, but so is the potential reward. Variable universal life insurance offers this risk-reward feature together with the premium and coverage structure of universal life insurance.
Single-Premium Life Insurance
A consumer can pay a single lump sum that consists of all of the premiums due throughout the duration of the policy. The amount of the lump sum can vary dramatically according to the age of the consumer and the value of the policy. It can be substantial, so a consumer may not be able to afford it early in their career. However, an advantage of a single-premium policy is that it cannot be canceled based on a failure to keep up with payments. This means that it can be more easily transferred if the policyholder chooses.
Survivorship Life Insurance
This type of life insurance is based on the lives of two people. The policy does not pay benefits until the second person dies, and they must continue to pay premiums after the first person dies to keep the policy in effect. This can be an estate planning tool for wealthy couples who will be subject to federal estate taxes. It also can be useful when one spouse is struggling with serious health issues, such that purchasing life insurance for them would be excessively costly. It might be less costly to purchase a policy based on the lives of both spouses if the other spouse is somewhat healthy.
A couple who owns a family business or significant real estate may consider a survivorship life insurance policy. Survivors may not want to sell those assets or may not be able to sell them easily. If one survivor wants to keep a business, but another does not, for example, the survivor who keeps the business could use their share of the policy proceeds as a buyout payment.
