Insurance

Essentials

• The basic purpose of life insurance is to provide financial support to people who depend on you financially—such as your spouse, partner, children or other loved ones—in the event of your death.
• Many types of life insurance are available. Key features to consider include the length of coverage, whether you pay fixed or variable premiums, how benefits are determined and costs of coverage.
• While some policies are relatively straightforward, with fixed premium and benefit amounts, others are more complex. Variable life insurance, for example, allows you to choose among investment options, offering the potential to build value but usually at a higher cost and, like all investments, with risk.
• Regulation of life insurance varies. Term and whole life insurance policies are regulated by state insurance commissioners. However, some life insurance policies are considered securities, which means the contracts must be registered with the Securities and Exchange Commission (SEC) and sales are regulated by FINRA.

Overview

Life insurance products are often a part of an overall financial plan. They come in various forms, including term life, whole life and universal life policies. There also are variations on these—indexed universal life insurance, which is generally not considered a security, and variable life and variable universal life insurance, which are considered securities and must be registered with the SEC. FINRA has jurisdiction over the investment professionals and firms that sell insurance products that are securities.

Insurance products often are developed to meet specific objectives. As with other financial products, insurance products can be complex and come with fees, so it pays to do your homework before you buy.

Here are some of the most common types of life insurance:

• Term Life Insurance. Term life provides coverage for a specified and limited period, known as the term. Premiums for most term policies tend to go up as you age or at the end of each renewal period. After the term ends, so does the policy and its coverage if it's not renewed.
• Whole Life Insurance. Whole life or ordinary life insurance is a type of permanent life insurance. It provides coverage for the life of the insured and can build cash value, which is a savings feature. Premium payments typically remain the same for the life of the insured.
• Universal Life Insurance. Universal life provides coverage for the life of the insured and also offers flexible premium payments and insurance coverage. The cost of your insurance protection and in some cases other costs are deducted from the cash or policy account value.
  • Indexed Universal Life Insurance. Indexed universal life falls under the universal life insurance umbrella; however, it follows a set stock index (such as the S&P 500) rather than allowing policyholders to choose their investments.
• Variable Life Insurance. Variable life is a type of security that offers fixed premiums and a minimum death benefit. Unlike whole life insurance, its cash value is invested in a portfolio of securities. As the policyholder, you can choose a mix of investments from those the policy offers. However, the policy's investment return is not guaranteed, and the cash value will fluctuate.
• Variable Universal Life Insurance. This type of security combines features of universal life insurance and variable life insurance. It offers flexibility in premium payments and insurance coverage, as well as an investment account.

Another type of insurance is long-term care insurance, which is designed to help manage health care expenses as you age and tends to cover what Medicare and most conventional health insurance policies don't: long-term custodial care expenses. It's a risk-management product to help cushion the financial blow of prolonged and expensive elder care or custodial care.

Considerations

Each type of life insurance has its own pros and cons. Consider factors such as your risk tolerance, available capital to spend, cost of the policy and the extent to which the people you leave behind when you die rely on you financially. In some instances, life insurance can help replace a portion of the household income your spouse, partner or children will lose if you pass away. In others, it can help cover funeral expenses or other debts.

Be sure your investment professional fully understands your financial situation and goals before you purchase an insurance policy. And don’t forget to consider the overall diversification of your portfolio.

As with any other investment professional, be sure to verify that the person offering you insurance is properly licensed. Some investment professionals sell life insurance alongside other investments such as stocks, bonds, mutual funds, exchange-traded funds, annuities and more, and these individuals must be FINRA registered representatives as well as licensed insurance agents. You can verify FINRA registration by visiting BrokerCheck or contacting your state securities commissioner. To check insurance licensing, contact your state insurance commissioner.

Learn More

• 1035 Exchanges
  The IRS allows you to exchange a life insurance policy you own for a new one insuring the same person without tax consequences on the investment gains earned in the original policy. But there might be other consequences. Learn whether an exchange is right for you.
• Life Settlements
  A life settlement, also known as a senior settlement, involves selling an existing life insurance policy to a third party for more than the policy's cash surrender value, but less than the net death benefit. Learn how a cash payment from a life settlement can have unintended financial consequences.
• National Association of Insurance Commissions (NAIC) Consumer Information
  NAIC provides many resources for consumers including consumer alerts, information about insurance products, a glossary of insurance terms and more.