Knowing what kind of life insurance to get can be scary and threatening to the average person. Understanding the basic kinds of insurance products available out there can reduce some of that anxiety. How can you tell whether you should go with term life insurance or whole life insurance?

Term life insurance generally has the lower monthly premiums of the two. You can get higher coverage for a lower monthly payment. This kind of insurance is valid only for a certain period or term, hence the name. You purchase term life insurance to cover you until the kids grow up or until retirement or for another specified time range. If you don’t make any claims against the policy, you won’t receive any benefits from this type of insurance during the life of the policy. Other types of insurance are like that, examples include home insurance and auto insurance.

Whole life insurance on the other hand is viewed as a type of investment. A portion of the money you pay each month is invested into an interest bearing account or investment vehicle thereby increasing in value over the life of the individual who purchases this type of insurance. If you were to cancel a whole life insurance policy, the insurance company would return to you the value of the investment that has accrued since you began the policy minus any fees. Given enough time, the interest on this kind of policy can even grow large enough to cover the monthly premium that is due thereby potentially giving you insurance without a monthly cost.

How can you tell which type of life insurance is right for you? Know some of the basic advantages of each before deciding. Term life insurance generally results in lower monthly premiums with higher overall coverage. With the money you save on this type of life insurance versus whole life insurance, most people can still invest in other things like mutual funds, real estate or the stock market and get as good or better rate of return than the investment in a whole life policy. Many people will buy whole life insurance for specific tax or estate planning purposes.

While knowing these differences helps, I would suggest you find yourself an insurance agent you feel comfortable with and discuss which insurance plan is right for you. There is no substitute for a good adviser when navigating potentially complicated and difficult waters like life insurance.

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In contrast, permanent or whole life insurance remains in force until you die. You pay the premium on a monthly basis for a pre-specified term, which can range between 10 to 20 years. A portion of your monthly payment pays the insurance and the life insurance company that provided the insurance invests the remainder. Eventually you don’t pay any premiums but your estate still receives a large payment upon death.

Whole life polices have been criticized because their investment returns are low. Thus you were often advised to buy life insurance protection with a term policy and invest the difference between term and whole life payments in a separate investment vehicle, such as mutual funds, stocks, or bonds. Once you have built up a large pool of assets you don’t need the insurance because the assets will provide security and stability in the event of an unexpected death.

However, there is a new, more flexible product called universal life insurance. While the life insurance company controls the savings in a whole life policy, the savings in a universal life plan are owned and controlled by the policyholder. Insurance companies offer a large variety of investment options for this savings component, including mutual funds. Thus, you have the ability to meet your life insurance needs and increase your return on investment.

The major advantage of a universal life policy is tax-advantaged growth. When you pay the policy premium, a portion of the premium pays for the insurance and a portion is invested. However, when you are ready to withdraw the money from your investment, your cost basis ( the portion not subject to tax) is higher with a universal life policy. The cost base for a universal policy is equal to the sum of all your premiums – the amount of money you have invested plus the money you have used to buy life insurance. This is very useful because increasing your cost base will ensure you pay less tax once you sell your investments within the universal life policy.

Universal life insurance provides a powerful combination of life insurance and tax-advantaged investment opportunities. Investors should realize that universal life insurance premiums work twice as hard as other premiums. They should also know that choosing the right product is an important element in the overall success of this strategy. Finally, the benefits of this strategy are magnified if you are in a higher tax bracket.

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Your Needs. If you need coverage only until your children graduate from college, for example, you might be better off with a term life policy.

Cash-value insurance is better suited for long term needs, such as planning estate taxes and providing lifetime security for your spouse. Some term policies cannot be renewed past age 70 or 80 and can become costly to renew as you approach that age.

The Cost. If term life insurance is more suited to your budget and you want life time coverage, consider a term life policy which can be converted into a whole life policy. Then you can convert the policy whenever your cash flow or needs dictate. You can also purchase a combination of term life and whole life insurance and gradually shift into whole life insurance over time.

Your Savings and Investment Goals. Whole life insurance can be a good long term investment vehicle, especially because the cash value has the potential to grow tax-deferred. Should you no longer need the insurance but want some extra cash, you may surrender the policy and collect the accumulated cash value. Be sure to discuss the tax consequences with your tax advisor first.

As an alternative, you could purchase term life insurance and invest what you save on premiums on your own. Compare the returns you can expect, and remember to take taxes into consideration if you plan to select taxable investments.

So, Should I Buy Term Life or Whole Life Insurance? Term life and whole life insurance both have advantages including immediate family protection. Deciding which type of policy and which features are right for you takes careful consideration and, most times, a comprehensible look at your financial plan. To discuss your life insurance needs and financial requirements, contact your financial professional.

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How does variable life insurance work?

All life insurance products are a form of investment vehicle. Standard no cash-in value life insurance policies like term life insurance invest life insurance premiums in ultra low-risk funds that are often obliged to return a certain level of interest. This provides the life company with confidence in receiving a tangible level of return, which is transferred through to the life insurance policyholder by way of a guaranteed lump sum payment upon death or terminal illness.

Variable life insurance is different from standard types of life insurance as the life company hands the investment reigns over to the policyholder. The life company may allow a percentage of the fund to be invested, or in some cases, all of the fund to be invested by the policyholder. Variable life policies come with the disclaimer that the life insurance company takes no responsibility for the performance of the variable life policyholder’s investments. Therefore, if the investments perform poorly the policyholder accepts the consequences that there will be little or no cash surrender value when the insurance is redeemed.

Is variable life insurance for you?

It is very important to think long and hard about variable life insurance before opting to take it on, as there is a high level of risk involved with this type of life policy. Ideally, variable life policies should only be taken out by seasoned investors who know there way around the investment markets. If you’ve never invested in the stock market before then a variable life policy is probably not for you.

However, if you are confident in your investing abilities this is what you stand to gain from taking out a variable life policy

1. Variable life policy potential:
A variable life policy has the potential to make substantial interest gains that are much higher than on a standard term life insurance policy. Whereas you might pay a small premium per month for a 100,000 pay out upon death with a standard policy, if you invest well with a variable life policy that 100,000 could be worth 500,000 or more when redeemed!

2. Tax advantages:
The cash surrender values of variable life policies are exempt from taxation until the point at which they are redeemed. Also, gains made via variable life policies are not subject to capital gains tax (CGT).

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