Life insurance is primarily used for two purposes: to provide a death benefit and to build cash value.
Death benefit
Although conditions vary between contracts, the basic benefit every policy provides is a death benefit — protecting your loved ones and ensuring they still have a financial resource in your absence.
Cash value
Some policy types accumulate tax-deferred cash value in addition to a death benefit. It can often be accessed during your lifetime through policy loans or withdrawals — helpful for emergencies, a college education or a vacation.
Life insurance products are evolving, with new innovations introduced regularly. While there is much variation, coverage typically falls under two categories: term life and permanent life. Physicians and dentists often carry both — insuring larger short-term needs while locking in permanent coverage so some level of protection is always in place.
Term life insurance
Term life, as the name suggests, provides protection for a specific timeframe — usually in ten-year periods from 10 to 30 years. If you die within the term, the insurance company pays your beneficiaries. If you outlive it, coverage ends; you may have the option to renew for another term or convert to a permanent policy before the term ends.
For those seeking a large death benefit, term life insurance may be an appropriate option. Additional features such as “Return of Premium” can enhance your coverage, insurance amounts can be up to 30 times income, and more carriers now offer “No Exam” options at higher face amounts.
Run your own term life quotePermanent life insurance
Permanent policies give lifetime protection, provided premiums and applicable charges are paid per the contract. This broad category offers flexibility and builds tax-deferred cash value. There are three main types:
Whole life
A death benefit for your entire life, a guaranteed rate of growth on the cash value, and dividends that can reduce future premiums or be taken as cash. Whole life typically outperforms fixed assets like CDs, money markets and U.S. Treasuries.
Guaranteed universal life
A level premium and level death benefit for life. Much like term life, but it doesn’t expire because there’s no ending “term.” From a cash-flow standpoint, the lowest-cost option for a permanent death benefit.
Indexed universal life
A permanent death benefit with cash value tied to market indexes such as the S&P 500, Russell 2000 or Euro Stoxx. You participate in market gains up to a cap; when markets are negative, the account earns 0% and takes no losses that year.
Cash value life insurance — additional benefits
Premiums contributed to these policies participate in a fixed or indexed interest rate, potential dividends, and grow on a tax-deferred basis. In most states, the cash value in a life insurance policy is protected from creditors — you can own it in your name, access the value, and it isn’t subject to a lawsuit. The cash value can be accessed at any time and is often used to supplement other retirement assets.