Thank you for joining us for Episode 40 of our Money Wisdom Question Series, where we answer common financial and retirement investment questions. Today’s question is, “What are the different types of life insurance?”
There are two basic types, but then underlying those two types, are all kinds of different little nuances, which is what creates a lot of confusion. Many of you have heard the term “buy term and invest the difference”. What that simply means is that you shouldn’t buy cash value insurance, you should buy term insurance and invest the difference that it would have cost you to buy cash value insurance.
Again, a lot of confusion over life insurance. Let’s just keep it real basic. There are two basic types of life insurance:
Term life insurance is where you simply buy insurance for a term like five, 10, or 20 years. Your premium stays the same for that period of time. At the end of that period of time, you just walk away. You could keep the insurance, but the premium gets so expensive (which makes sense at that point) that typically you walk away. You don’t build up any cash value. There’s no reserve built up. There’s no time where you can stop paying the premium. Just think of it like homeowners or auto insurance. You pay the premium each year and each year the insurance company takes that risk away from you.
Whole life, universal life, variable universal life, or variable whole life insurance are all types of cash value life insurance. These are all much more expensive in the beginning because you pay a much higher premium, but cash value builds up in the policy. Now, a lot of people think well the cash value is supposed to be an investment. The cash value is actually a byproduct of the insurance company having to set money aside because remember, you can keep that insurance for your whole life. It’s designed to be kept forever.
Therefore, there’s a higher probability that the insurance company will pay out a death claim because you don’t have to drop the insurance. Within that, there’s a bunch of different little nuances.
As I mentioned, the cash value can be looked at as an investment. Sometimes, very high-income earners or wealthy families buy cash value insurance for a little bit of a tax advantage. There are some unique tax advantages to cash value insurance. The last thing I want to say is if you have an old cash value policy, don’t just cash it in. Talk to an insurance expert. You may be able to sell that policy if you don’t need it anymore, for more than the cash value.
I don’t mean to confuse anyone. It does get a little technical, but there are two simple types of life insurance. Cash value insurance, which is more expensive. Term insurance, which is very affordable, but runs out after a period of time.
Thanks for joining me and I hope you found this information helpful!
P.P.S. Feel free to submit questions here for a chance to have them answered!
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