By: Linda Moore
We understand why we need to buy life insurance — to help protect our families, businesses, and assets from the risk of dying. Often, the larger question is what type of life insurance is appropriate for our needs. Regardless of the type you choose, life insurance death proceeds are paid to the beneficiary(ies) generally income-tax free.
The two main categories of life insurance are Term and Permanent insurance. Within these two broad categories, there are many variations.
Term Life Insurance
Like its name implies, term insurance insures you for a specified period of time (a term). The policies available can vary from annually renewable term (ART) to level-premium term to return of premium term. Some policies might have a feature that lets you convert your term insurance to permanent insurance without evidence of good health. All policies of this type stay in force for the term as long as you pay your premiums on time, but there are some key differences:
Annually renewable term (ART): The premium increases each and every year.
Level-premium term: Your premiums will not change for a number of years, typically 10, 15, 20 or 30 years. After that time, however, premiums could increase annually and significantly based on your then current age.
Return of premium term: If you outlive the initial term of the policy and you satisfy certain terms and conditions, you can get back most or all of the premiums you paid. Premiums will increase after the level premium period and are not returnable.
Permanent Life Insurance
Permanent insurance is designed to last for your entire life, unless you surrender the policy, take substantial loans or withdrawals, or if you allow it to lapse by not paying sufficient premiums. While the primary reason to purchase any type of life insurance policy is for the death benefit, permanent policies are designed to also potentially accumulate cash value. A policy’s cash value may consist of both guaranteed and non-guaranteed values. Non-guaranteed values may include dividends or earnings which are not guaranteed and will change. You can access the cash value of the policy through loans and/or withdrawals. However, loans and withdrawals reduce a policy’s cash value and death benefit, may negate or reduce the duration of the guarantee against lapse, and may have tax consequences and may lapse the policy.
Permanent life insurance comes in several shapes and sizes:
Whole life: This type has a premium that typically does not increase. The face value of the policy is guaranteed not to fall below the initial amount, so long as you pay the premium when due and there are no substantial loans or withdrawals.
Universal Life (UL): This policy offers premium flexibility. You can pay less or more than the target premium established or even skip premiums. The policy will remain in force as long as there is sufficient cash value in the policy to pay for the insurance charges. The death benefit may be a level face amount, or it could be a combination of the face amount and the cash value.
Variable Life: With this type, you direct the investment of net premiums and any cash value. Most policies offer a variety of investment options to choose from. If your selected investment options perform well, policy cash values increase; likewise, if they perform poorly, cash value can increase more slowly, or even decrease. While these types of policies offer an opportunity for gain if the underlying investments do well, there is also the risk of losing your insurance protection if the investments underperform. Careful consideration must be given to both your insurance needs and your investment risk tolerance prior to purchasing a variable life policy.
What’s Right for You?
What’s right for you depends on your situation and the reasons you are buying life insurance. All types of life insurance policies have exclusions, limitations, reductions of benefits and terms for keeping them in force. Your financial professional can provide you with costs and complete details. The features and benefits of life insurance will vary by carrier and policy.
The best way to select a policy is to work with a life insurance professional who can evaluate how much insurance you need, the type of policy that may be right for you and your budget.
This article provides general information for the subject matter covered. The features and benefits of life insurance will vary by carrier and policy. Insurance is issued by The Prudential Insurance Company of America, Pruco Life Insurance Company (except in NY), and Pruco Life Insurance Company of New Jersey (in NY and NJ). Variable insurance is offered through Pruco Securities, LLC, member SIPC (Pruco). All are Prudential Financial companies located in Newark, NJ. Each is solely responsible for its own financial condition and contractual obligations. All guarantees are based on the claims-paying ability of the issuer and do not apply to the underlying investment options.
For variable life insurance, investors should consider the contract and the underlying portfolios’ investment objectives, risks, and charges and expenses carefully before investing. The contract’s prospectus and the underlying portfolios’ prospectuses contain information relating to investment objectives, risks, and charges and expenses as well as other important information. Contact your financial professional for the prospectuses. You should read the prospectuses carefully before investing.
It is possible to lose money by investing in securities.
0206868-00001-00, Ed 01/25/2013, Exp 05/10/2014
Provided courtesy of The Prudential Insurance Company of America, Newark, NJ. For more information, contact Linda Moore, a Financial Professional with The Prudential Insurance Company of America’s agency located in Downers Grove, IL. She can be reached at firstname.lastname@example.org and/or (630)442-6845.