Life Insurance 101: Choosing the Right Policy

Cracking the complex and confusing lingo of life insurance can be a chore. Following is a tutorial that might help:

Term Life: Term life insurance provides basic protection in the event of an untimely death. It can be purchased in various durations, ranging from five to 35 years. There are various types of term life policies, including level, annual renewable and mortgage insurance. Some term life policies are guaranteed renewable, while others are not.

Permanent Life: Unlike term life, which may expire at the end of the original duration without having ever paid a claim, permanent life insurance remains in effect until the policy matures. It also builds cash value in addition to the face value of the death benefit. There are several forms of permanent life insurance, including whole life, universal life, limited pay and endowment.

Whole Life: Whole life insurance combines a level premium with cash value and guaranteed death benefit. Although typically more expensive to fund in the initial stages, whole life policies are typically less expensive for those who intend to hold a policy for 20 years or longer, due to the increased dividend payments that offset the cost of premiums later in the life of the policy.

Universal Life: Universal life insurance provides permanent coverage and higher rates of return in exchange for a decreasing cash amount. Premiums tend to be flexible, and death benefits may also be modified in keeping with the ability and needs of the policyholder.

Limited Pay: Limited pay is a less commonly used form of permanent life insurance that locks in a payment period by which all premiums must be completed.

Endowments: Endowments are a form of life insurance that tend to be more expensive due to a reduced payment period. The cash value of the policy is expected to equal the death benefit by a specified period or age. Overfunding certain whole life policies could result in the Internal Revenue Service designating a policy a Modified Endowment Plan and subject to different tax rules and rates.

When in doubt, speak to your agent about the right policy for your life stage.