Life Insurance: Policy Types

Basically, there are three types of life insurance policies (Term, Whole life, Endowment) or we call it as the traditional life insurance. But now, insurance companies began offering a non-traditional life insurance (VUL). 

Term Insurance

A term policy is a pure life insurance covering a specific period of time. The face amount of the policy is paid to the beneficiaries only in the event of death within the stated number of years. If you outlive the policy, your coverage ends and you get nothing back. Why? Because it has no savings. There is no cash value.

A term insurance is right for you if you cannot afford a whole life plan or if you think, you just need it temporarily  especially when you have debts or loans.

Whole Life Insurance

Whole life insurance covers the insured's entire lifetime. Hence, as to premium payments,  you have to pay your entire life. Some insurance companies offer some policies where premiums are payable only for a specified number of years but the coverage is whole life. You have to ask your agent about it.

Unlike term insurance, whole life insurance provides not only death benefits but also living benefits (cash value). Living benefits can be used for a future need like college fund. However, the policy will be terminated when you get all the benefits.

Endowment Insurance

Endowment policies are like term and whole life. Its coverage is limited (term) e.g. 10 years, 20 etc. however, unlike term insurance, it has a cash value (whole life). The face amount will be paid upon maturity or upon death of the insured.

Endowment policies are usually used for a definitive purpose like college fund, retirement etc.

Variable Universal Life Insurance/Variable Unit Linked Insurance (VUL)

A VUL insurance is like whole life. The only difference is that the cash value (fund value*) can be invested in stocks, bonds or money market funds (mutual funds) depending on the insured's choice. Because of that investment feature, the fund value is not guaranteed. Why? Because returns on these investment funds are not guaranteed depending on the market.

One of the advantages of having a VUL policy is that the fund value can be used as a premium payment. However, like whole life, the policy will be terminated if it's all used up unless you make premium payments again to your policy to ensure the benefits are still intact. It can also be withdrawn fully or partially. However, these can have effects on your death benefits. You can clarify this to your agent. 

Another advantage we can consider also is it's tax benefit on the investment part. Unlike mutual funds and/or stocks, it is not subject to estate tax if designated beneficiary is irrevocable.

A VUL insurance's premium is more expensive compared to term or whole life. Why? because aside from the insurance cost, there are other charges like fund management fees and other expenses. 

*Since the cash value is invested to mutual funds, it is to be called fund value.

To determine what's the best policy for you, determine your objectives or purpose of having one. Assess your needs thoroughly. Is it merely for protection? For how long? Do you want to have some savings or some investment on top of your insurance coverage? Or Do you want BTID (buy term and invest the difference)?

Sources: Seminars attended, web blogs/articles, Investopedia









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