Life Insurance
In addition to offering annuities, insurance companies also offer a variety of life insurance products. Both life insurance and annuities offer a death benefit, which is paid to a beneficiary. With an annuity, the beneficiary receives the original investment plus any earnings. With life insurance, the beneficiary receives the face value of the policy.
Term life insurance is purchased for a specific amount of time. The purchaser pays premiums that provide a guaranteed death benefit to a beneficiary if the insured dies during a specified period of time. If the insured does not die during this period, the death benefit expires. The purchaser has the option to renew the insurance policy, although renewing will be much more expensive because the insured is now at a higher risk for death. Term life insurance does not build any cash value. The premium paid by the policyholder is never returned to the purchaser.
Whole life insurance has an investment component. The purchaser pays set premiums, which are locked in over the life of the insured, and the insurance company guarantees a minimum amount of payment upon death. With whole life, the insurance company guarantees a minimum cash value, even if the recipient stops paying into the policy. Similar to the way in which a fixed annuity operates, the insurance company draws from a general account, and if the general account does well, the cash value may grow more than the guaranteed rate. At any time, the policy owner may withdraw part of the cash value or borrow from it. However, if the loan is not paid back, the death benefit will be lowered.
Universal life insurance is a type of whole life insurance that provides the purchaser with more flexibility in terms of the death benefit and the premiums. Universal life insurance premiums can be adjusted depending on the amount of coverage the purchaser desires, allowing her to save money if she decides she or the insured person doesn’t need as much co