Life insurance basics, Part 2

Last week, I discussed the importance of life insurance and how to determine how much insurance you need, and I provided a brief description of the types of life insurance. This week, we'll delve more deeply into the types of life insurance and discuss the advantages and disadvantages of each.

Whole life, or ordinary life, is the most common type of permanent insurance. The premiums generally remain constant over the life of the policy and must be paid periodically in the amount indicated in the policy.

Universal life, or adjustable life, allows you to pay premiums at any time, in virtually any amount, subject to certain minimums or maximums. You also can reduce or increase the death benefit more easily than under a traditional whole life policy. To increase your death benefit, the insurance company usually requires you to furnish evidence of your continued good health.

Variable life provides death benefits and cash values that vary with the performance of a portfolio of investments. You can allocate your premiums among investments offering varying degrees of risk and reward—stocks, bonds, combinations of both or accounts that guarantee interest and principal.

The cash value of a variable life policy is not guaranteed, and the policyholder bears the risk. However, by choosing among the available fund options, you can allocate assets to meet your objectives and risk tolerance. Good investment performance will lead to higher cash values and death benefits. If the specified investments perform poorly, cash values and benefits will drop. Some policies guarantee that death benefits cannot fall below a minimum level. There are both universal life and whole life versions of variable life.

The following points can help you determine which type of insurance best suits your needs.

Term insurance

• Advantages: Initial premiums generally are lower than those for permanent insurance, allowing you to buy higher levels of coverage at a younger age when the need for protection often is greatest. It's good for covering needs that will disappear in time, such as mortgages or car loans.
• Disadvantages: Premiums increase as you grow older. Coverage may terminate at the end of the term or become too expensive to continue. The policy generally doesn't offer cash value or paid-up insurance.

Permanent insurance

• Advantages: As long as the premiums are paid, protection is guaranteed for life. Premium costs can be fixed or flexible to meet personal financial needs. The policy accumulates a cash value against which you can borrow. (Loans must be paid back with interest or your beneficiaries will receive a reduced death benefit.) You can borrow against the policy's cash value to pay premiums or use the cash value to provide paid-up insurance. The policy's cash value can be surrendered—in whole or in part—for cash,or it can be converted into an annuity. (An annuity is an insurance product that provides an income for your lifetime or a specified period.) A provision or "rider" can be added to a policy that gives you the option to purchase additional insurance without taking a medical exam or having to furnish evidence of insurability.
• Disadvantages: Premium levels may make it difficult to buy enough protection. It may be more costly than term insurance if you don't keep it long enough.

Zall, Bureaucratus columnist and a retired federal employee, is a freelance writer based in Silver Spring, Md. He specializes in taxes, investing, business and government workplace issues. He is a certified internal auditor and a registered investment adviser. He can be reached at miltzall@starpower.net.