As explained in a previous article entitled "Using Life insurance when Estate planning", life insurance can be an invaluable tool when estate planning. It can provide solutions to various problems and serve as an important financial instrument in reaching your financial objectives. To property asses the appropriates when using life insurance, it is important to understand its various types. Below we have outlined the main characteristics of the basic types of life insurance.
Permanent life insurance
Permanent life insurance is what most people refer to when thinking of life insurance. The protection is for the entirety of your life or a designated period. Upon death, the amount of coverage is paid to the named beneficiaries. Permanent life insurance can be divided into multiple sub-types, most notably: term insurance, term to 100 and universal life insurance. In certain circumstances, permanent life insurance can be used to build additional cash values in a tax-sheltered manner.
This type of insurance covers the individual for a specific period. It is usually for a short period. Insurance proceeds will only be issued if you died during the period that is covered. It is often used to fund short-term estate needs, such as paying off an estate's liabilities (i.e. mortgages, loans).
Term to 100 insurance
Unlike term insurance, term to 100 insurance covers a long period of time. It usually requires the payment of annual premiums and remains enforced as long as they are paid. Furthermore, this type of insurance does not have any cash value.
Whole life insurance
Whole life insurance offers coverage for the entirety of your lifetime. Unlike term 100 insurance, it offers a saving component. The passing of time will result in the accumulation of a cash value in the policy.
Universal Life Insurance
Unlike the previously mentioned insurance policies, Universal life insurance provides a tax-deferred savings component. The premiums paid are used to fund the insurance, as well as certain investment options. The premiums can be increased or decreased, depending on the amount of tax-deferred saving are wanted. Additionally, the premium can be suspended if the subscriber has accumulated enough cash value to fund the portion solely attributed to the insurance coverage.
Tax-exempt universal and whole life insurance
Universal and whole life insurance alike allow the accumulation of cash value in the policy on a tax-exempt basis. This advantage works by paying more than the cost of the coverage. The excess amount paid is then invested. As the money grows, annual taxes imposed on this amount are not due. Both these insurance policies can benefit individuals who want to maximize the value of their estate.