Risks Vs. Benefits With the Types of Life Insurance

Universal and variable life insurance are variations of permanent life insurance.

Universal and variable life insurance are variations of permanent life insurance.

Consumers have a lot of options when it comes to life insurance plans. There are risks and benefits to each, depending on what you're looking for in a plan. The biggest difference between policies is that some are term life insurance and some are permanent life insurance. Term life insurance tends to be less complicated compared to permanent insurance. Term policies are also cheaper than permanent life insurance, but they don't retain their cash value.

Term Life Insurance

With term life insurance policies, you pay premiums to your insurer and it pays out a specified amount to your family if you die. You might have to renew your term life insurance policy on a periodic basis, usually once a year. Term life is a good option if you only want to pay for life insurance during certain time periods, like when your children are dependent on you or you still have a mortgage. Once you stop paying premiums, you're no longer insured.

Permanent Life Insurance

If you want more comprehensive coverage, choose a permanent life insurance policy. When you sign up for a permanent life insurance policy, you pay the annual premium until you die or cash in your policy. You can often make larger payments during the initial portion of the policy so you can stop paying at a specified point. Permanent life insurance policies work more like an investment fund than a traditional insurance plan. Permanent life insurance plans are more expensive than term life insurance. Unlike term life insurance, however, permanent plans retain their cash value.

Universal Life Insurance

Universal life insurance is a good choice for individuals who want a more flexible variation of permanent life insurance. Unlike traditional permanent life insurance plans, universal life plans allow the user to vary the death benefit amount and premium payments at different points in time. With a universal life plan, your insurance company deposits your premiums into an interest-bearing account and deducts insurance charges. The interest rate on the plan can change according to market conditions. If interest rates go up, you could end up with a higher death benefit than you would with a permanent or term life plan. On the flip side, you could end up with a smaller death benefit if interest rates decline.

Variable Life Insurance

If you want to take a more active role in managing the investment portion of your life insurance, a variable life plan may be for you. Variable life insurance plans are similar to universal life insurance plans, but with a variable plan you manage the investment portfolio yourself. Because of the nature of the plan, you can only buy one from a registered securities dealer. Most variable life insurance plan owners invest the funds in a combination of stocks and bonds. Variable life insurance can earn a higher-than-normal return for savvy investors. However, if you haven't properly diversified your portfolio -- which is often the case with self-managed investments -- you could also stand to lose a large chunk of your insurance investment.


About the Author

Based in San Diego, Calif., Madison Garcia is a writer specializing in business topics. Garcia received her Master of Science in accountancy from San Diego State University.

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