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Life insurance types and options

Four major types of non-variable life insurance coverage are:

  • Term Life
  • Whole Life
  • Guarantee Universal Life
  • Index Universal Life

Each of these provides a death benefit, but they can differ significantly in length of coverage, premium flexibility, accumulation and distribution of cash values, and other factors. While specific policies vary by company, these general descriptions can help you understand the basic differences.

  Term Life Whole Life Guarantee
Universal Life
Index Universal Life
Coverage needs Temporary period of time 10-30 years Lifetime Up to lifetime Up to lifetime
Cash value accumulation No cash value Guaranteed cash value Interest crediting rate set by the insurance company Interest crediting rate can be linked to the percentage change of an index
Premium flexibility Fixed for an initial period Fixed Flexible Flexible
Guaranteed death benefit For length of term period coverage Lifetime Lifetime coverage or "dialed down" to any length of coverage Guarantees typically range from 10-30 years

Term Life Insurance

Term life insurance is basic coverage that generally does not build life insurance policy cash value. Consumers typically buy term life insurance to provide death benefit protection for a specific period of time.

Premiums for term coverage are usually initially lower than other types of life insurance because the policy only provides a death benefit for a defined period. Later, some term insurance policies can be extended or converted into another type of coverage.

However, if you renew or convert your coverage, your new premium will probably be higher than your previous coverage, and can continue to increase as you grow older.

Whole Life Insurance

As its title indicates, whole life insurance provides a lifetime death benefit for a set premium amount and builds cash value you can use while you’re living.

The strength of a whole life insurance policy is that it provides guaranteed cash values and benefits in return for fixed premiums. A trade-off to consider is that a whole life policy may build cash value at a lower rate than alternative coverage options.

Guarantee Universal Life Insurance

Guarantee Universal life (GUL) insurance policies provide a death benefit as well as the opportunity to build policy cash value. This coverage is different from term and whole life insurance because, within policy limits, you can vary the amount and timing of your premiums. Typically, you can also increase or decrease your death benefit (based on your insurability). As long as you maintain sufficient policy value to keep your policy in-force, your policy’s flexibility enables you to pay premiums as your circumstances allow.

Your cash value in a GUL policy is determined by the amount of premiums you pay, the declared interest crediting set by the insurance company, and policy charges.

As a policyowner, you have more flexibility with GUL than with whole life, but you assume additional risk. GUL policies usually have fewer guarantees than whole life coverage, so you must carefully manage premium payments and any distributions taken to help ensure your policy will stay in-force. This type of life insurance policy usually offers a built-in no lapse guarantee that can last for the lifetime of the insured life or for a shorter period selected by the policyowner.

Index Universal Life Insurance

Index universal life (IUL) insurance includes the premium flexibility and adjustable death benefit that typical UL coverage provides. Plus, IUL can provide the potential for greater policy value growth than UL, with less risk to you than a Variable Universal Life policy.

IUL policies link the growth of policy value to the percentage change of one or more widely-followed financial market indices such as the S&P 500® Index, Nasdaq-100®, or Dow Jones Industrial Average. As a rule, IUL policies also include a fixed-rate interest crediting option.

Insurers offering IUL policies credit interest at rates that are linked to the percentage change of a selected index. These companies typically provide a "crediting rate zone" with a cap that represents the maximum crediting rate and a floor that represents the minimum crediting rate. Based on the percentage change in the index, interest will be credited between the cap and floor.

With IUL, your policy value can be credited with higher interest rates than whole life and UL policies typically provide. You may have greater downside protection than Variable Universal Life, but, compared to Variable Universal Life, the upside potential is more limited.

Index Universal Life Insurance coverage is typically purchased for one of two reasons:

A death benefit index UL product solution is designed to provide affordable death benefit guarantees with the opportunity for cash value growth to provide financial flexibility.

A cash accumulation index UL product solution provides a death benefit, and is also designed to accumulate policy value that can be used to supplement income, either as a withdrawal or policy loan, on an income tax-free basis1 later in life.

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1A withdrawal may be free of federal income tax or “tax free.” If the policy is not a Modified Endowment Contract (MEC), then, except for certain changes in the policy during the first 15 policy years and especially during the first five policy years that cause cash distributions that may be taxable although they do not exceed investment in the contract (Basis), withdrawals are not taxable to the extent that they do not exceed Basis. Policy loans are free of federal income tax when taken except if the policy is or becomes a Modified Endowment Contract (MEC). If the policy is a MEC, a distribution (withdrawal or policy loan, including any increase in the policy loan balance because of unpaid loan interest) is taxable to the extent that policy value exceeds Basis. A 10% penalty tax may apply to distributions from a MEC if the policyholder is under age 59½. Basis is premium paid minus any long term care rider charges and minus nontaxable amounts previously recovered through policy loans taken from a MEC and withdrawals. Assignment or pledge of a MEC as security for a loan would also be a taxable event. If the policy becomes a MEC, then any distribution (withdrawal or policy loan) taken in the policy year in which the policy becomes a MEC and in subsequent policy years is taxable the same as a distribution from a MEC. Any distribution taken within two years prior to the policy becoming a MEC may also be taxable the same as a MEC. Termination, other than by reason of the insured’s death, of a life insurance policy with a policy loan balance may be deemed a distribution of the outstanding policy loan balance, resulting in possible adverse tax consequences for a policy that is not a MEC. Consult a tax advisor about possible tax consequences. We are not responsible for any adverse tax consequences.

159111L 10/17/14