All life insurance plans start with the same basic principle. The policyholder pays a premium in exchange for tax-free lump sum benefit that’s payable to their beneficiaries upon death.
Along with a tax-free death benefit, certain types of life insurance can offer a tax-deferred savings component.
There are four main categories of life insurance and below are a summary of the main features and differences between plans.
Term Insurance
Term insurance is for a temporary need (ie: 10, 15, 20, 30 years). The premium is level during the initial selected term but increase at each renewal.
Pros: low initial premiums. Individuals can purchase a large amount of coverage at a lower cost (especially at younger ages).
Cons: premiums increase at each renewal, most term plans expire before life expectancy
Where it fits? Short-term, temporary needs.
Term to Age 100
Term to age 100 or T100 provides level guaranteed death benefit and premiums for life
Pros: a guaranteed premium until age 100
Cons: if you miss premium, the policy will lapse. This is the most budget-friendly of the permanent plans, but it lacks investment and growth potential that makes other permanent plans more cost effective in the long run.
Where it fits? Permanent need for insurance, on a tight budget
Universal Life
This type of policy provides level guaranteed death benefit and guaranteed insurance cost. The policyholder pays a minimum or maximum premium depending on budget.
Pros: policyholder can choose type of insurance charges. These plans included a tax-deferred accumulation fund with various investment fund options. Overall flexibility with premiums and investments.
Cons: policy holder must manage investment choices and premiums are higher than term insurance.
Whole Life
Whole Life policies offer level guaranteed premiums and death benefit. Various premium options including level for life and quick-pay options. Dividends and cash values can be withdrawn or used to offset premiums.
Pros: annually increasing guaranteed cash values. Tax-efficient accumulation of funds and insurance company manages funds in a participating investment pool.
Cons: the highest initial premium of all plans. No investment flexibility like with Universal life, less flexibility.
Where it fits? For permanent, evolving needs and additional tax-efficient accumulation of funds.
What is right for me?
Choosing the right insurance is based on each person’s unique objectives. We would be happy to review your needs and recommend which type of coverage might work best for you. Feel free to book a meeting to discuss.