Life insurance typically benefits those left behind when the insured person dies, but some policies act as a savings plan and can be converted to an annuity, benefiting the insured as well as beneficiaries while he or she still lives. “Whole” life insurance offers the choice of two types of return -- cash value and death benefit -- each with its own advantages and drawbacks.
Life Insurance Choices
Specific plan details vary according to the company issuing the a policy and the state in which it operates, but life insurance falls into one of two categories. Term life insurance pays a death benefit to survivors – period. It provides a lump sum payment at death during a specific period of time -- typically 10, 20 or 30 years -- during which the insured pays a modest premium. Whole life -- alternately called universal, ordinary, standard or permanent life insurance -- requires higher premiums, but offers more options to policy holders. Options include keeping the policy active, without any term limit, until the insured dies, withdrawing money, taking a loan from the policy and repaying it -- or even converting the premiums to an annuity for family members.
Death Benefit Basics
While term life insurance's lower premiums and big payouts might seem more attractive, your family will collect only if you die during the term of the insurance. Term insurance is a good choice for young marrieds with children or a mortgage to protect, but converting it to whole life at the end of the term can be expensive. Companies often choose term insurance to indemnify themselves against sudden loss of a “key man.” For young families, a term policy provides money for survivors' needs -- mortgages, children's education or living expenses. Whole life's higher premiums appeal to older insureds who have higher income or who want a more flexible, longer-term policy, but the death benefit serves the same purpose. The main problem with term life or the death benefit of whole life is that the insured cannot benefit from its payout.
Cash Value Basics
Whole life premiums are pegged to potential needs that differ according to the age and responsibilities of the insured, typically making premiums during the early year of a policy higher. Depending on policy specifics, insureds can borrow against paid-in premiums or can cash out where permitted. The cash value of the policy is based on the total of all premiums paid in, minus fees determined by the company and outlined in the policy. Although whole life is an open-ended term that can provide longer protection, the cash value provides a tempting source of ready cash, as well as a savings plan.
Social security is another financial instrument that offers a death benefit, and some pension plans offer early withdrawals based on cash value. When deciding whether to utilize cash value or wait until investments come to term, always weigh the availability of cash against the fact that the full value of the investment is only available at full term or as a death benefit.
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