The policy is written on the life of a person, known as the insured. The owner makes payments, known as premiums, to the insurance company for the policy. In return, the insurance company agrees to pay the death benefit to the beneficiary if the insured dies within the stated term.
Many employers offer a type of term insurance known as "group" term to their workers. Group policies cost less, and many companies pay the premiums. Generally, the policy is only good for as long as the worker stays with the company.
Term insurance is suggested for those who only need the death benefit for a certain period of time. See Life Insurance: Term Insurance, Virginia Cooperative Extension publication 354-144, for more information on term insurance.
Whole-life works well for those who want a guaranteed death benefit no matter how long the insured lives, and who have enough money to pay the premiums. See Life Insurance: Whole-Life Insurance, Virginia Cooperative Extension publication 354-145, for more information on whole life.
For example, the owner may decide to double the premium paid one year. The extra money will go in the cash-value account. Most universal life policies have cash-value accounts that pay at least 3 percent or 4 percent interest. Another year, the owner may decide not to pay any premium, and use money in the cash-value account to pay the costs for that year. Policy owners may have a higher death benefit while their children are young, and a lower the death benefit once their children are grown.
There are some limits to the changes that can be made. The policy owner needs to be careful not to pay too little, and end up with no cash value. If this happens, and the owner still wants the insurance, he or she will need to buy a new policy. Some policies allow the beneficiary to receive both the death benefit and the cash-value account at the death of the insured. Be sure to read the policy closely as some only pay the death benefit.
Universal-life works well for people who want lifetime coverage with added flexibility. See Life Insurance: Universal-Life Insurance, Virginia Cooperative Extension publication 354-146, for more information on universal life.
A variable universal-life policy is for people who want lifetime coverage, and who can tolerate risk. The buyer of a variable universal-life policy would prefer to invest money in stocks and bonds to safer assets. See Life Insurance: Variable Universal-Life Insurance, Virginia Cooperative Extension publication 354-147, for more information on variable life.
|Insurance Type||Premiums||Cash Value||Lifetime Coverage?||Best For...|
|Term||Usually lowest||No||No - some policies can be renewed, but at higher costs.||People who only need insurance for a limited time|
|Whole||Usually higher than term in early years, but lower than term in later years of the policy||Yes - general account of insurance company (Long-term bonds and mortgages)||Yes||People who want guaranteed lifetime insurance|
|Universal||Premiums could be higher or lower than whole-life depending on how much is desired in cash value||Yes - general account of insurance company (Short-term money market)||Yes - but depending on the premium level, there may be a risk that policy will lapse||People who want lifetime insurance, but with added flexibility|
|Variable Universal||Premiums could be higher or lower than whole-life depending on how much is desired in cash value, and the actual rates of return||Yes - stock funds, bond funds, other assets||Yes - but depending on the premium level, there may be a higher risk that policy will lapse||People who want lifetime insurance, but who tolerate risk and prefer to invest in equity assets over safer assets|
Cash Value - The amount of total premiums paid for a policy minus the costs for insurance in whole-, universal-, and variable universal-life policies. The cash value grows tax-free in an insurance policy.
Death Benefit - The total cash payment made to the beneficiary upon the death of the insured.
Insured - The person on whose life the insurance has been purchased. If the insured dies, a death benefit will be paid to the named beneficiary.
Owner - The person or entity who owns the insurance policy. The owner may or may not be the insured. The owner can designate the beneficiary, and is responsible for paying premiums. See Life Insurance: The Impact of Ownership, Virginia Cooperative Extension publication 354-142, for more information on the impact of ownership.
Premium - The amount billed to the owner of an insurance policy (usually monthly, quarterly, or annually) by the insurance company. In term and whole-life, the full premium must be paid to keep the insurance. In universal- and variable universal-life, the amount billed may or may not be a mandatory payment to keep the insurance.
Virginia Cooperative Extension materials are available for public use, re-print, or citation without further permission, provided the use includes credit to the author and to Virginia Cooperative Extension, Virginia Tech, and Virginia State University.
Issued in furtherance of Cooperative Extension work, Virginia Polytechnic Institute and State University, Virginia State University, and the U.S. Department of Agriculture cooperating. Alan L. Grant, Dean, College of Agriculture and Life Sciences; Edwin J. Jones, Director, Virginia Cooperative Extension, Virginia Tech, Blacksburg; Jewel E. Hairston, Administrator, 1890 Extension Program, Virginia State, Petersburg.
May 1, 2009