Insurance used to be about death benefits alone. Not anymore. These days, life insurance buyers have plenty of options. It all begins with choosing between a term life insurance or a permanent life insurance. While both offer an income tax-free benefit to your beneficiaries when you pass away, these two types of insurance differ in coverage. Term life policies cover only a specific term (typically 10 to 30 years) while permanent life policies provide lifelong coverage for as long as you pay your premiums. What’s more, permanent life policies build cash values which you can use even before death. Sounds interesting? Here’s how it works.
How cash value works
The cash value component of your permanent life insurance is built over time as a portion of your premium payments is set aside for investment. You can access that cash when you need to fund emergencies; when you want to secure a loan; when you want to stop paying your premium and use the cash value instead; or when you simply want to surrender your policy. Keep in mind though that borrowing against your cash values lowers your death benefits.
Fixed or Flexible
If you think a permanent life insurance suits your needs, you can choose between two main types: whole life and universal life insurance. Both offer cash values but whole life policies have a fixed premium and a fixed cash value growth, while those of universal life insurance vary as you have the option to raise or lower your premium payments within certain limits, and your cash values may increase or decrease based on market performance.
So, if you’re looking for permanent coverage with guarantees, whole life would be a good fit. But if you’re a savvy investor, who seeks flexibility and higher return potential, your best option would be universal life insurance.
Risks and rewards
One type of universal life insurance that lets you enjoy market opportunities is the indexed universal life (IUL). IUL provides permanent coverage and builds cash value. You can choose to put the cash value in a fixed account, indexed account, or a combination of both. In a fixed account, your cash value grows at a fixed rate set by the insurer. In an indexed account, the growth of your cash value is tied to the performance of a broad securities index like the S&P 500. When the index goes up, so does your earnings. And when the index drops, your earnings will reflect this as well. To minimize your risk, your earnings are subject to a guaranteed minimum and maximum rate of return.
Is IUL for you?
While IUL’s advantages are impressive, its challenges are worth noting as well. For one thing, when the stock market isn’t performing well your returns will be low. This may mean paying more into your account to prevent your policy from lapsing. Capped returns could also limit you from fully reaping the rewards of market upswings.
To find out if IULs are right for you, try to assess your needs and your appetite for risk. Better yet, ask your Mercado Global Insurance agent so you can make the most out of this wealth-building opportunity while getting the protection you want for your beneficiaries.
