Individual life insurance is primarily designed to protect against the financial loss that the death of a loved one can create. Life insurance provides a death benefit that can provide much needed income to support your family, your business, apply towards any major debt, or to send your children to college. Additionally, life insurance may offer many tax advantaged access to cash which will help supplement a retirement years down the road.
There are 3 types of individual life insurance products that Texas State Insurance Services offers and specializes in for our clients all over the entire state of Texas: term life insurance, return of premium “ROP”, and permanent life insurance. All 3 options offer an income tax-free death benefit to the policy beneficiary(ies). There are, however, several key differences to keep in mind.
Term Life Insurance
Term life insurance provides life insurance coverage for a specific term, or period of time.
A term policy pays a death benefit to the insured’s beneficiary(ies) only if they die during the specified term that the policy is in force, providing the premiums are paid. Once the term (coverage period) of the policy is over, the insurance coverage lapses – meaning that it no longer provides any insurance coverage.
- To continue coverage after the policy term has lapsed, the policyholder needs to reapply for a new insurance policy. At that time, the insurance company must reconsider that individual’s health, age, and insurance rates when determining whether or not to grant them a new policy and insurance coverage.
- Premiums are set at a certain rate and must be paid according to a set schedule. Term insurance premiums are generally less expensive than permanent life insurance when considered over a short time span. The cumulative costs of renewing term insurance, however, can eventually cost much more than the cumulative cost of purchasing permanent life insurance only one time.
Return of Premium (ROP) Term Life Insurance
This can be a great solution for someone looking to get life insurance coverage that you would like to have for a specific period of time but allow you to receive all of your premium back if you outlive your policy. To put this into perspective, we like to use the example of your auto insurance carrier refunding you all the premiums you paid in if you did not have an auto accident or claim. Doesn’t exist does it? Well this scenario is available in Life Insurance products like the ROP.
- ROP is Insurance that pays your premium back.
- Term lengths typically range from 20-35 years.
- Insurance protection that can help pay back at the end of the term.
Permanent Life Insurance
Permanent life insurance provides life insurance coverage for the entire lifetime of the insured.
- Permanent policies pay a death benefit to the beneficiary(ies), provided the premiums are paid.
- Many of our carriers offer policies that provide protection for critical illness, critical injury, and long-term care needs.
- Premiums are generally more expensive than for term life insurance because a portion of the premiums are applied toward the build up of cash value within the policy. However, the cost of renewing term insurance can eventually cost more than the cost of purchasing a single permanent life insurance policy.
- Some permanent life insurance policies accumulate a pool of money called a “cash value.” Depending on the policy and provider company, this cash value can be used to provide a number of living benefits such as tax-free loans and tax-favored withdrawals. In addition, it can sometimes be used to increase the policy death benefit or pay policy premiums. The usage of a policy’s cash value is, of course, subject to the restrictions, limitations and potential penalties associated with that particular policy.
There are several different types of permanent insurance. Listed below are the four most common policies and the features of each:
Whole Life, also called ordinary life, is traditional life insurance that will cover the insured for his/her entire (whole) life. In general, whole life is the most basic form of permanent life insurance and premium payments typically remain constant for the life of the insured.
Universal Life, sometimes called adjustable life, offers more flexibility than traditional whole life insurance. Universal life insurance allows the policy owner to pay their premiums on a flexible basis. Though premium payments are not required on a rigid schedule, the policy owner must pay premiums into the policy to cover the costs associated with the insurance coverage if the policy owner fails to do this, the insurance policy may lapse. Universal life policies also feature a flexible interest rate on the policy’s cash value that, at times, may be higher than the policy’s guaranteed interest rate.
Indexed Universal Life Insurance is similar to conventional universal life insurance. It provides a death benefit, and the policy has a cash value that can grow over time. The advantage of indexed universal life is that it may provide tax-deferred growth of your account value, linked to growth of an index. Indexed universal life products also provide a guaranteed minimum interest rate so that even if the indexed account performs poorly, your policy will be credited interest.
(i) Variable Life is a permanent life insurance policy that offers a fixed premium payment schedule (like whole life), but accumulates a cash value that can be invested in portfolios of securities in an account separate from the general assets of the insurance company. The policyholder has the discretion to choose the subaccounts offered by the policy in which they wish to invest. Variable life policies provide the upside opportunity for the investor to grow the cash value of the policy by investing in securities. With this, however, comes the risk of negative portfolio or market performance and the possibility of losing the money in those investments. The insurance company does not guarantee investment returns and the cash value will fluctuate depending on the performance of the underlying portfolio investments.
(i) Variable Universal Life is a life insurance policy that blends the premium payment flexibility benefits of universal life insurance with the invested portfolio and upside market potential of variable life. Many VUL policies feature tax deferred earnings, policy loans, and the ability to make withdrawals and loans from the policy cash value. It is important to understand, however, that policy loans & withdrawals will reduce the cash value and death benefit and loans are subject to interest charges. Like variable life insurance, VUL policies rely primarily on securities investments to grow the policy’s cash value with this growth potential comes the risk of negative portfolio or market performance and the possibility of losing the money in those investments.
Purchasing the right life insurance is one of the most important decisions that you can make. Contact Texas State Health Insurance to discuss protection strategies that may be right for you.
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