This was originally published on Monday, April 28, 2014, in the Pacific Daily News. Click here to subscribe to the PDN.
Question: I am buying life insurance for the first time and, quite frankly, I’m confused by the different types of life insurance policies. Could you clarify the policies to help me decide?
Answer: First off, I commend you for thinking about your future, and the expenses you will save your family when the time comes. Not all policies are created equally; here are the types of life insurances most companies offer:
Term life insurance
Term life insurance is typically the most affordable and simplest life insurance. It offers protection for a specific number of years. The policy is set for a limited time, usually 30 years; they are sometimes referred to as “temporary” life insurance. Premiums usually are a lot lower than other policies making it affordable for most. The annual premium remains the same throughout the life of the policy.
Whole life insurance
Whole life insurance is permanent for the entire life of the insured. Unlike a term life insurance, whole life insurance has a guaranteed premium rate and guaranteed cash value accumulation, which means you pay the same every year no matter how long you have had the policy. Your premium payments are divided among the insurance, administrative fees, death benefits and the investment or dividends that your policy incurs. Withdrawals that you make towards your policy are tax-free up to the amount of premiums you paid minus the dividends paid out and previous withdrawals. You can use the dividends and cash buildup to pay the premiums of the policy. These policies have a higher premium payment because they are permanent and provide not just death benefits but cash.
Universal life insurance
Universal life insurance also is known as the flexible life insurance. Like the whole life insurance policy, this policy is permanent and provides cash value. The premiums, level of protection, and the cash value can be adjusted as needed. The amount of cash values can be guaranteed to earn a specific minimum. The cash value also is tax-deferred just like the whole life insurance.
Life insurance is a great way to have peace of mind that your loved ones will be protected when you pass. Just like any other insurance policy it should be reviewed annually and you should take the time to understand exactly what’s covered.
Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at email@example.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.