Tips to Buy Permanent Life Insurance (Part 2)
Money Girl helps you understand permanent life insurance and gives 5 tips for buying it.
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This is the second episode in a 2-part series about whether you should buy permanent life insurance. In part one I covered the differences between permanent and term life. And I reviewed one common type of permanent policy called whole life. So be sure to read episode 312 for more information.
In this episode we’ll cover 2 more types of permanent life policies: universal and variable. Plus you’ll learn 5 smart tips to buy permanent life insurance if it’s right for you.
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Types of Permanent Life Insurance
There are 3 main types of permanent life insurance: whole, universal, and variable. Although the benefits they provide are different, each type covers you for your entire life. Term life insurance, on the other hand, only pays a benefit if you die during a specified period of time, such as 10 or 20 years.
Here’s a summary of the 3 types of permanent life insurance:
Whole life insurance gives you a guaranteed death benefit and a guaranteed rate of return on your cash value, when you pay a fixed annual premium. This is the most straightforward type of permanent life policy—but it’s also the most expensive because it comes with no risk to the buyer.
Universal life insurance doesn’t offer the guarantees of a whole life policy, but it has much more flexibility. For instance, you can reduce the death benefit of a universal life policy to save money as your needs change from year to year. Or you could increase the benefit (as long as you’re still healthy) and keep the same policy.
You can even reduce or temporarily suspend premium payments on a universal life policy if you have a financial hardship. Or you can pay more into the policy to take advantage of higher returns when interest rates go up.
When you buy a universal life policy, you’re given a sales illustration that estimates your annual premium that’s necessary to fund the policy for life. Though premiums are less expensive than a whole life policy, they aren’t guaranteed. The cost of the policy could increase up to a maximum amount if interest rates go down.
If you can’t afford to pay higher premiums, you may be forced to cancel the policy. This is the major downside of universal life.
Variable life insurance is a policy in which your cash reserves are invested in securities, such as stocks, bonds, and mutual funds. It’s similar to universal except that you choose how to invest your money from a menu of options. Variable life gives you the most flexibility and risk of all the permanent policies.
If the investments you choose perform well, your cash value could skyrockets above what you could typically earn from a whole or universal life policy. But the bad news is that if your investments don’t perform, you could lose part of your cash value.
And if your cash value declines, it’s up to you to make up the loss by paying higher premiums to fund the policy for life.