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Life Insurance Options

Should I purchase term insurance or permanent coverage? If you're in the market for life insurance, sooner or later, you'll need to make this decision. The Michigan Association of Certified Public Accountants outlines the characteristics of both term and permanent insurance—and its variations, including whole, universal and variable life—to help you decide which is best for you.

Term Insurance Provides the Largest Death Benefit for Your Premium Dollars
Term life insurance provides pure income protection at a low cost. As its name implies, you can buy it one year at a time or for a specific term, typically 5, 10, or 15 years. If you die within the term selected, a benefit is paid to your beneficiary. If you outlive the term, no death benefit is paid.

The cost of term insurance gradually rises as you age.

There are two basic types of term policies from which to choose. One type is an "annual renewable policy," in which the premiums increase each year. The other is a "level premium policy," which allows you to lock in a premium for a fixed number of years.

Permanent Insurance Combines a Death Benefit with an Investment

Permanent insurance policies such as whole life, universal life, or variable life, combine a death benefit with a savings feature. Premiums can be several times higher than you would pay initially for the same amount of term insurance because, in addition to a death benefit, part of your premiums are invested and build up a cash value. Any earnings are tax-deferred until you cash in the policy or it is distributed to your beneficiaries. If your beneficiary receives the earnings, they are exempt from federal income tax.

Whole Life Insurance
Whole life is the most common type of permanent insurance policy. Both the death benefit and your premium, which is based on your age and other factors, remain the same, year after year. You can borrow against the policy at a rate that is typically lower than the market rate. If the loan is not repaid, the outstanding balance is deducted from the benefit paid at your death. You can withdraw some of your cash value and still remain insured, or you can surrender the policy and retrieve its full cash value. Since commissions and higher initial premiums slow the cash value accumulation in the early years of the policy, whole life insurance is best used as part of a long-term plan.

Universal Life Insurance
Universal life insurance offers more flexibility than a standard whole life policy. With a universal life policy, you can vary the amount of the premiums you pay and choose the amount of death benefit you want. That means, with the same premium dollars, you can choose a lower death benefit and a larger cash buildup, or a smaller cash buildup and a higher death benefit. For this flexibility, expect to pay higher fees and administrative costs.

Variable Life Insurance
With variable life insurance, the policy holder controls the investment of the cash value portion of the policy, choosing from investment options with varying degrees of risks and rewards offered by the insurance company. Earnings generated by the policy are not taxed while the policy is in force.

Since the value of the death benefit and the cash buildup fluctuates depending on the performance of investments you choose, these policies come with a certain level of risk. Good investment performance will lead to higher cash values and death benefits. The reverse holds true, although most policies come with a minimum death benefit.

CPAs say that life insurance serves different purposes at different times in your life. But keep in mind that its most important function is income replacement, so make every effort to buy as much protection for your family as you need. Once you've determined your needs, shop around. Look for a company and an agent who can help you get the right type and amount of insurance at an affordable price.

You seek the expertise of CPAs at tax and audit time, of course. But CPAs also promote personal and professional financial security year round. Visit the CPA Referral Service on the MACPA website to search for a CPA in your geographical area or specific area of expertise.

This article was submitted by the Michigan Association of CPAs.