TYPES OF LIFE INSURANCE
Types of Life Insurance
Term Life Insurance
This is the most simple type of life insurance and offers protection for your loved ones if you die. Term life insurance plans have a set period of time (typically 20 to 25 years from when they start) when they provide coverage. Policies that renew automatically each year and expire around retirement age are advised, since you will not have to worry about extending your current policy if you become sick. Some insurance policies guarantee a fixed premium each year, while others typically start with lower premiums but rise over time.
Whole Life Insurance
Whole life insurance is substantially more expensive than Term Life, but includes the ability to add to your policy’s “cash value,” which is the amount of the policy value in excess of the actuarial death benefit. Some people use these policies as a tax-advantaged way to build retirement savings or have their estate avoid probate taxes, as an investment. Evaluating the potential advantages of a Whole Life policy for retirement or estate planning purposes is extremely complex, and you should talk with a qualified insurance agent about the pros and cons.
Universal Life Insurance
Universal life insurance is a new kind of life insurance that allows people to either pay a large one-time premium at the beginning of your policy or pay your premium as variable installments that fall within a certain range. Evaluating Universal Life can be complex, so this is another type of insurance that requires analysis by a qualified insurance agent.
Accidental Death and Dismemberment
Is supplemental coverage that protects against accidental death or specific serious injuries such as limb loss or paralysis. Employers occasionally provide accidental death and dismemberment insurance as a benefit for employees that are required to travel.
Uses for Life Insurance
The number one use for life insurance is to help support your family and any other loved ones who rely on your income. Life insurance can also be used to pay any outstanding medical expenses or other debt you may have, and can also help with any funeral costs and estate administration expenses.
Life insurance financial proceeds typically are paid very quickly after a death certificate is issued and accepted by your insurance company. That’s much faster than proceeds from an estate that typically take several months before they’re approved by a probate court.
Some types of life insurance, like Whole Life or Universal Life, let you borrow against the “cash value” of your life insurance policy in some circumstances. This isn’t an option for the most common type of life insurance, Term Life.
What to Consider Before Buying Life Insurance
You need to think about how much life insurance you need, how long you need it for, and whether you have other benefits that can help your family if you pass away.
- How much do your family members depend on your income and would they face any financial difficulties if something happened to you?
- Do you have any debts or expenses that your family would have to pay if you passed away?
- Did you factor in other life insurance plans that currently provide you with coverage, such as a policy you get from your employer or any US Veteran’s benefits?
- Will your family members be eligible to receive Social Security or survivor’s benefits?
You’ll also need to think about what type of life insurance to get. Term Life covers you for a set period of time, and is usually timed to last until you expect to retire. Whole or Universal Life can both provide lifetime coverage and additional retirement or estate advantages, but typically at much greater cost.
Level Term vs. Decreasing Term
A level term policy has a stable death benefit that remains unchanged over the policy’s existence, while the death benefit in a decreasing term policy is reduced over time, usually by the same amount each year. Unless a level term policy is also a level premium policy (see just below), the annual premiums you pay typically rise each year over the term of the policy. A decreasing term policy usually has a level premium each year.
Level Premium vs. Increasing Premium
A regular level life insurance term policy typically has annual premiums which rise each year. Since this is the norm for the majority of term life insurance, the “increasing premium” label isn’t used often. Level premium life insurance guarantees that your annual premium will stay the same for a st number of years or even over the entire life of the policy. Since you’re insulated from price increases over time, the starting annual premium for level term life is almost always higher than regular term life.
Is the Policy Renewable?
Some term policies can be “renewed” after the initial term of 5 to 30 expires, but will probably result in higher premiums. This can allow you to maintain a current policy that otherwise might not have been available due to age and/or health.
Is the Policy Convertible?
Some short term life insurance policies can be changed into a longer term policy without requiring any additional information or medical exams. This can helpful if you’re trying to minimize cost now but preserve some flexibility in your life insurance coverage in the longer run.
Can the term insurer cancel my term life insurance policy?
If you fail to pay your life insurance policy’s premium within the company’s grace period, your provider can cancel your policy. As long as you pay your premiums, they cannot cancel your policy if the status of your health changes. If your life policy is provided by your employer and you no longer work for that company, your life insurance coverage can end, although some companies offer the option for you to “take your policy with you” as long as you pay the premiums going forward.
Will my term life insurance policy be protected if my insurer goes broke?
Each state has an association that is responsible for guaranteeing insurer funds so that you’re protected if your insurer goes out of business.
Who can take out a policy on my life? Can I take a policy out on someone else’s life?
Someone who can show that they rely on your income and will face financial hardship if you die can take a life insurance policy on you. Likewise, you can also take out a policy on someone else’s life if you’re dependent on their income.
The “face amount” of Whole Life insurance is the amount of the benefit that will be paid when you die. This death benefit paid by your whole life insurance policy is generally tax free income, but there are specific situations where it may be taxable.
The “cash value” is the accumulation of your premiums after allowances for company expenses and claims. Over time the cash value grows, usually tax-deferred, and you can access that money by borrowing against the policy loan or taking a payment of the cash value. If a policyholder takes a loan against their policy it can be tax free instead of a cash surrender which is taxable.
There are many types of Whole Life insurance, reflecting differing premium payments (single or annual), and whether the cash value of the policy is eligible for dividend payments from the insurer. Since Whole Life policies combine investment, tax minimization, and estate planning capabilities with life insurance benefits, evaluating them requires professional advice tailored to you.
Types of Whole Life policies
Whole life insurance policies that are indeterminate have premiums that vary year to year based on economic conditions.
Limited pay policies
You are only required to pay your premiums for a limited number of years. After this payment period is finished, you still maintain coverage.
Single premium policies
Have a large single payment as a premium.
Interest sensitive policies
Have policy interest rates that depend on the current market which are used to increase your policy’s value instead of dividends.
There are also different options you can add to your whole life policy, like being able to miss premium payments if you become disabled. When choosing an insurer you need to look at the monetary strength of that company because that helps ensure that they will be able to honor your policy. You can be approved for whole life policies through simplified issue, guaranteed issue, or fully underwritten. Simplified issue policies only require you to answer some medical questions, guaranteed issue plans do not have any requirements, and fully underwritten plans usually have a longer process that requires a medical exam.
What is Accidental Death and Dismemberment Insurance
AD&D insurance policies provide specific payment schedules for different circumstances. If you purchase AD&D insurance, you only pay for continued coverage and your policy will have to be renewed annually. Premiums change annually, as well.
Four types of AD&D insurance
Group life supplement
AD&D insurance that is incorporated into a group life insurance policy provided by your employer.
An individual benefit that you can choose to add to your insurance coverage independently of any employer insurance coverage.
Offered to employees who travel extensively for corporate business. This policy can be incorporated into your benefit plan by your employer
Offers coverage for dependents
AD&D insurance may be beneficial if you are concerned that you might die or become dismembered in an accident. It can be especially useful if you fear that a permanent loss of limb, mobility, eyesight or hearing might severely impact your ability to work. It can often be more beneficial to use the money that would have gone to your AD&D premium to purchase better life or health insurance. If you are interested in adding AD&D insurance you should contact an agent to help you analyze the terms and specifics of your perspective policy.
Term vs. Whole vs. Universal
Term life insurance provides life insurance for a set period of time, or term, after your policy starts. Term life policies usually are annually renewable for a period typically lasting from 5 to 30 years.
Whole life policies provide life insurance for your entire life, as long as you pay the premiums, and also can offer tax advantaged savings benefits. They are more expensive at the beginning than term life policies.
The Pros and Cons of Whole Life Insurance
While whole life insurance may cost more money, it provides both death benefits (life term life) of a certain “face amount” and also has a “cash value,” which reflect an accumulation of your premiums after allowances for your insurance company’s expenses and claims.
When you are young, your whole life premiums are more than the cost of insuring your life at that time, and this excess amount is added to the cash value of your policy. Over time the cash value grows as the life insurance company invests it, and this increase is almost always tax-deferred, so you won’t have to pay taxes on the increase each year. Many people use the cash value of their Whole Life policy to provide additional financial flexibility.
Accessing the Cash Value of Your Whole Life Account
While whole life insurance may cost more money, it provides both death benefits (life term life) of a certain “face amount” and also has a “cash value,” which reflect an accumulation of your premiums after allowances for your insurance company’s expenses and claims. You may be allowed the access the cash value by taking loan against your policy or getting a payment of the cash value. If you surrender your policy you will receive the accrued cash value as of that point in time (which is different from the face amount of your policy, which is what your beneficiaries get if you die). The actual amount that you can receive will depend whether there are any outstanding loans or unpaid premiums that can be deducted from the cash value.
The Pros and Cons of Term Life Insurance
Term Life insurance pays a death benefit If you die within the period covered by the policy. This time period varies by policy, but typically can be renewed annually for anywhere from a 5 to 30 year period from when it starts. Unlike whole life, a term life policy does not last for life.
Term life insurance policies have lower initial premiums, but this amount can change and will typically rise over time. Beneficiaries receive a death benefit only if the policyholder dies during the term period.
Term life insurance provides the simplest way to provide benefits to your family if you die, but does not offer a tax advantaged savings mechanism like whole life, and the policy ends after the policy life.
Pros and Cons of Universal Life Insurance
Universal life insurance has lower premiums than whole life insurance, but incorporates a savings component. Unlike whole life insurance as your circumstances change so will your premium. Policyholder’s can also use the value acquired by the policy to help pay the premium. With a universal health life insurance policy the insurance company determines a minimum interest rate they are going to provide their policyholders, which if the company does better than that minimum interest rate is added to the policy’s cash value. Policyholder’s can borrow against the cash value of their policy tax free.