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Choosing the right type of life insurance in California

There are two basic types of life insurance: term life insurance and cash value life insurance.  There are many policy variations on these two types of life insurance.  

Term Policies provide life insurance for a specified period of time.  These policies provide benefits in the event of death, but they generate no cash value.  If you have a limited amount to spend, and only need insurance for a finite period of time, you may be able to get more coverage by buying term insurance than by buying cash value insurance.  Keep in mind that the cost of term insurance increases as you get older, which may make it more expensive than cash value insurance in the long run.   Today’s term policies usually have two sets of premiums -guaranteed maximum premiums and current premiums.  Current premiums are usually much lower, but they can be changed by the insurance company.  The insurance company cannot increase the current premium above the guaranteed maximum premiums shown in the policy.  When you buy term insurance, you need to make a choice as to how long you want the protection. You may renew the policy without a physical examination for the period of years specified in the policy.  Some term insurance can be converted to cash value insurance up to a specified age with no physical examination.  Premiums for the converted insurance will most likely be higher than the premiums you would be paying for the term insurance.

Cash Value Insurance combines death benefits with an accumulation feature.  The buyer of a cash value policy pays more in the early years than for term insurance, but the premium not needed to pay for the cost of the death benefit accumulates at interest.  If the policy is surrendered before the insured person dies, there may be a cash value paid to the owner.   Make sure the agent/broker provides you with the method by which the cash value is determined and that they obtain this information based on the policy’s guaranteed value. As a general rule, it is not a good idea to buy a cash value life insurance policy if you plan to surrender early.  If all premiums are paid, cash value insurance usually lasts for the whole life of a person and pays death benefits to the beneficiaries named in the policy upon the death of the insured.  The cash value can be used as loan collateral for borrowing funds at the interest rate specified in the policy.   Any outstanding loans are deducted from policy proceeds at death or at policy surrender.

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Some of these products may enjoy tax advantages.  A policy lapse or surrender may create a taxable event and may generate a Form 1099.  Be sure to check with your tax advisor.  Some of the most popular types of cash value insurance are described below:

Whole Life Insurance (also known as straight life, ordinary life, and traditional permanent insurance) has guaranteed premiums and death benefits, and a minimum interest rate, which will be credited to the funds accumulated in the policy. On some whole life policies, higher interest rates may be credited to those funds depending on the future performance of the insurance company’s investments.

Universal Life differs from whole life insurance in that it allows the policy owner to vary, with limitations, the amount and timing of premium payments and the death benefit.  Cash values are accumulated by crediting premium payments and interest to a fund from which deductions are made for expenses and cost of insurance.  The rates at which the interest is credited are declared by the company or may be specified in the contract.  Like term insurance, universal life insurance policies usually have two sets of premiums—guaranteed maximum premiums and current premiums. Current premiums may be lower, but they can be changed by the insurance company up to the maximum.  They also can include a minimum interest guarantee.  Because of its flexibility, a universal life policy can also be structured to operate like term insurance. 

Variable Life differs from whole life insurance and universal life insurance in that policy owners direct the distribution of their premium payments among several different accounts or funds rather than by the company’s choosing.  Typical account choices for variable life are common stock, bond, mortgage, and money-market accounts.  With this type of policy, the death benefit and cash value benefits vary in relation to the value of the investments underlying the policy.  If the value of the account increases, so will the benefits; if the value of the account decreases, so will the benefits, subject to a minimum guarantee.  Variable life insurance is more risky to the policy owner than the other forms of cash value insurance, but there is a possibility of greater returns.

Variable Universal Life Insurance combines the flexibility of universal life insurance with the investment account features of variable life insurance.