A term life insurance policy is a contract with an insurance company to provide a specific amount of money to the named beneficiaries upon the death of the insured. Annual renewable term provides life insurance coverage of a specified amount for a time period of one year. Over time, through renewing the policy, premiums increase for the same death benefit protection due to rising mortality risk. Level term is life insurance that has fixed premiums for a certain time period such as 5, 10 or 20 years. Decreasing term provides insurance coverage with fixed premiums for a specified time period but with a decreasing death benefit. Decreasing term life insurance is typically used to hedge risk associated with loans.
Permanent life insurance such as whole life products require guaranteed level premiums for a specified period of time. A portion of each premium payment covers the expense of insurance and a portion goes toward increasing the policies cash value. This cash value earns interest and can be used by the insured if needed. Universal Life insurance is a permanent insurance that allows for flexible premiums and death benefit options. This means the policyholder can increase or decrease the death benefit by paying higher or lower premiums without having to change the policy. It also means the cash value will grow based upon the amount of premiums paid and the interest rate credited to the policy.
What are the Tax Benefits?
Life insurance policies offer the primary benefit of having all proceeds be tax exempt. If the head of a household owns an insurance policy on themselves and passes away, the beneficiary, usually the spouse, gets the proceeds tax free.
Why an Annuity?