Which Type of Life Insurance is Right For You

 In the United States of America, the oldest form of life insurance was a “Fraternal Assurance” alliance. But this is not intended as a history of life insurance.   
 Whole life insurance evolved from organizations that wanted to provide mutual benefits to their partners/members and their families. Those life insurance contracts would provide financial support of a contracted amount based on the dues or fees paid to the contract. The issuing company or fraternal organization was mutually owned by all the participating members. The dues collected for the policies were pooled together and invested. Then when a claim was presented, the contract was paid to the beneficiary of the contract.
 In the meantime, if a member wanted to borrow from the general fund of the organization, they could do so depending on how much they had contributed to the general fund by way of their dues, and how much the fund had grown from investments.
 From those early fraternal organizations grew the financial institutions that became life insurance providing companies. And the contracts retained the basic structure and benefits that were provided by the earlier versions of mutual family assurance organizations.
 Today, only a relative few life insurance providers maintain their mutual ownership status, while the majority have become “Stock” companies held in ownership by stockholders. Regardless of the standing of the provider – whether Mutual or Stock – Whole life Insurance holds to the same basic provisions as were originally designed for the contracts.
 In return for Premium payments, (formerly called 'dues' or 'fees'), the insurance provider will pay a dollar amount specified by the contract to the beneficiary of the policy upon the death of the insured. 

 Whole life insurance became the prevalent type of life insurance in the 1940s, and provides a death benefit that is guaranteed for the lifetime of the insured. The death benefit will not decrease or terminate. Whole life also has a Cash Value component.
 The premium for a Whole Life policy is determined at the time of application for the policy. So, the premium is decided based on the age and health of the insured, and the amount of death benefit at the time the contract is entered into,. The premium is Guaranteed never to increase.
 The cash value component of Whole Life grows by means of a guaranteed interest rate, which is compounded annually and is exempt from any taxation as long as it remains in the policy. Interest rates paid to whole life cash values vary slightly from one provider to the next, but are generally around 3%.
 With Mutual providers, the cash value also receives annual dividends which are determined by the profits of the company and are declared annually.
 With mutual providers, the death benefit may also grow each year depending on how the annual dividends are directed.
 The cash value of the policy may be withdrawn from the policy, or leveraged as collateral for policy loans.
 Most Whole Life policies are designed to last the entire lifetime of the insured, or until the insured reaches age 100, or in some cases 120. Upon the death of the insured, the total amount of death benefit is paid to the beneficiary tax free minus any outstanding balance on policy loans.
 If the insured reaches age 100, (or 120), the policy is determined to have “matured” and the entire death benefit, less any policy loan balance, is paid to the owner of the policy tax free.
 The owner of a Whole Life policy may surrender the policy at any time. Upon surrender of the policy, any cash value the policy has accumulated will be paid to the owner of the policy. In the case of policy surrender, any growth of the cash value beyond the “cost basis” will be subject to income tax. 

 Cost Basis is the total of all premiums paid into the policy and is after tax money, so it is not subject to any further taxation.
 Depending on the particular provider, additional “Riders” may be added in the design of the policy. Riders provide additional benefits, and as such carry their own premiums. One such rider is a Long Term Care insurance, which provides a specified amount of finance benefit to be paid in the case where the insured requires long term medical care.
 Another rider is called Paid Up Additions. This rider adds a portion of whole life benefit to the total death benefit that is then fully paid for by the premium for that rider. In most cases most of the premium for that rider also contributes to the cash value of the policy and thereafter earns interest that compounds along with the rest of the cash value.
 Most Whole life providers also offer a Term rider. Term riders can increase the total death benefit of the policy at a lower premium than what the same amount of whole life would cost.
 

 Whole life offers the most guarantees and versatility of all life insurance. So it can be the best solution for every life insurance need. Because the death benefit never decreases and the premium never increases, whole life offers the most security.
 So, if you want to be sure that you will leave a financial legacy to your heirs, Whole Life is the best choice.
 Because of the guaranteed cash value growth, especially when designed for maximum cash value availability and growth, whole life can also provide a protected, tax free emergency and investment fund, and even retirement income. And the cash value of whole life insurance can provide a source of virtually free personal loans to use with the Infinite Banking strategies.   

 Straight Whole life alone is the most costly in premium of the three types of life insurance... at the start of the contract when compared to the other types.  And typically that is the way most whole life policies are sold – Whole life with no term rider. So, premium price point is really the only disadvantage. However, by designing a whole life policy with a term rider making up the greater portion of the death benefit, can greatly reduce the total premium. And, again, the premium will never increase, so when designing a whole life policy with a large term rider, that one disadvantage largely disappears. And when you consider that premiums for the other types of insurance continue to increase each year, and the cash value growth with Whole Life, Whole Life becomes a greater and greater value-to-cost every year. 

 Term Insurance is actually the oldest form of life insurance. It came into being in the 1700s. It was simply a contract that, in return for premiums paid by the owner of the contract, would pay the survivors of the insured a specified amount of money upon the death of the insured – IF the insured died within the term period that the contract covered.
 Term is the simplest and cheapest type of life insurance when compared to the other types of life insurance, when all other things are equal. In other words, for a 35 year old man in standard good health, a Term insurance policy for a one million dollar death benefit will carry a premium that is far less than a one million dollar Whole Life or Universal Life policy. And the shorter the term, the lower the premium.
 The duration of the term policy is selected at the beginning of the contract. The term or duration options for the policy typically are 10, 20, and 30 years. So, if the insured dies while the policy is still in force, (during the 'term' of the policy), the insurance provider will pay the death benefit to the beneficiaries tax free.
 But what happens if the insured lives past the end date of the term of the policy? Answer: The policy expires (terminates), and no payment is made to the insured or the beneficiaries. The insurance provider keeps all the premiums paid, and if the insured wants to buy a new insurance policy, they may be able to – depending on age and health – but, the premium will now be much higher than it was for the terminated policy. That's because now, the insured is 10, 20, or 30 older that they were at the start of the previous policy. And if their health has declined, the premium will be that much higher.
 So, we must now consider the value of Term versus Whole Life. Again, for a 35 year old man and a one million dollar death benefit, a straight Whole Life policy may carry a premium of $1160 per month while a 20 year Term policy for the same amount and same insured may be $87 per month.
 But in 20 years when the Term policy expires, a new 20 year term policy will carry a premium of $492 per month while the Whole life policy started at age 35 will still be $1160 per month. And now – 20 years into the policy, the Whole life will have a cash value of $365,000, (Term insurance never grows cash value), and the death benefit will have grown, (with a mutual provider) to $1,376,000. And there will be more money paid by the provider to the cash value of the policy every month than what the insured is paying in premium for the policy. So, basically at that point, the policy is free, and the cash value is growing at a substantial rate!
 Let's take it forward another twenty years... Now the second 20 year term policy has expired with no payment to the insured or beneficiaries, (no cash value). Now for a new 20 year policy for the insured who is now 75 years of age, and let's say still in standard good health...   
 Oops...  At age 75 he can't get another 20 year term policy, because that would continue past his projected life expectancy, and the actuary's won't approve a term policy if the insured is expected to die before the policy terminates.   
 So, now all he can qualify for is a ten year term.   At current rates, a new Ten year Term with a million dollar death benefit will carry a premium of $1750 per month while the Whole Life, which started at $1160 per month 40 years ago, is still in force at $1160 per month. And at the end of another ten years will have a death benefit of $3,100,000, and a Cash Value of $2,456,000.
 

 Term insurance can provide a low cost Mortgage Protection solution, especially when the insured is buying their first home and cash flow is tight.
 Term Insurance may be a good option for younger newly married individuals who are in a career that currently pays a lower salary, but will increase significantly over time. And where they want to be sure their spouse will not struggle financially if they should die in the near future. Otherwise, in every case, Whole Life provides a much greater value and beneficial solution.
 

 Term Life has no cash value, so when the policy terminates, there is no payment to the owner or beneficiaries. The cost of insurance continues to increase and the premiums increase significantly upon renewal.
 

 Universal Life Insurance is the most recent development in life insurance. It was introduced in  1979. It started out as “Variable Life Insurance” and the name referred to the ability to adjust or 'vary' the premium paid.   
 Universal Life is considered a “Permanent” and “Cash Value” life insurance the same as Whole life, and there are three varieties of Universal Life. They are: Guaranteed, Indexed, and Variable. Those terms refer to how the cash value component is dealt with.
 Guaranteed Universal pays a set “guaranteed” interest rate to the cash value of the policy.   
 Indexed Universal attaches the cash value growth to a specific stock index, such as the S&P 500, Dow Jones, etc. In that model, when the index gains, the cash values grow. When the index looses, the cash value won't grow at all. It won't lose value due to the index failure, but it won't gain anything.
 Variable Universal invests the cash value of your policy in specific stocks that the owner of the policy may personally choose, or the owner can assign the choice of stocks to the provider. In this model, when the stocks make gains, the cash value grows. When the stocks lose, the cash value also loses.
 There are management fees built into these models, and there are ceilings set on the cash value gains. So, if an Indexed policy's associated index gains 15%, and the policy has a 12% ceiling, the cash value will gain a maximum of 12% MINUS the management fees and cost of insurance.
 When a Variable Universal policy's associated stocks make gains, the cash value will gain a comparable amount MINUS the management fees.
 Universal Life insurances are a hybrid of Term insurance and specific riders that are designed to grow cash value. As such, the cost of insurance increases each year – just as with a term policy. Additionally, as already mentioned there are management fees charged with these policies.
 While in most cases the premiums for a Universal policy are presented as being guaranteed, the management fees and cost of insurance can increase. When those costs and fees increase, but the premium isn't voluntarily increased, those costs can eat into the cash value of the policy. If that goes on long enough, the cash value may be exhausted and the policy can lapse. 

 Because of the various fees and costs associated with Universal policies, and the risks connected to the cash values, even though premiums for Universal policies are slightly lower than with Whole Life, I cannot say in good conscience that Universal policies are “best” for anything. 

 Universal life policies contain costs and fees that can increase at the will of the provider. And the cost of insurance does increase and is not “locked in” as with Whole Life. As a result, cash values of Universal policies take a longer amount of time to accumulate. And after a number of years will usually be consumed by the fees and costs causing the policy to lapse. 

 How much insurance is enough really depends on what your goals are for the insurance. For example, if your sole purpose for the insurance is Mortgage Protection, then you need a policy with a death benefit at least large enough to cover the balance of your mortgage. So, if your mortgage is $600K, then you need a policy with a $600K death benefit.
 If you want to use a Term policy for Mortgage Protection, you'll need a 30 year Term with a $600K benefit.
 If your main purpose for your life insurance is to provide financial security for your family in case of your death, the general rule is a death benefit equal to ten times your annual salary. So, if your annual salary equals $70K, you'll want a policy with at least a $700K  death benefit.
 If you want to use your life insurance as your Family Bank and use the Infinite Banking strategy with the cash value, you'll want at least ten times your annual salary in death benefit, but likely you'll want to buy a policy with the largest death benefit you can afford and qualify for. And in this case, only a Whole Life policy will do. And it should be with a Mutual company that pays dividends in addition to the guaranteed interest rate. And the policy should be designed with the cash rich riders that make for the greatest cash value growth and availability.   
 In every case, my advise is Whole Life that is designed for the greatest benefits including the lowest premium that can be achieved for the benefits desired.