Life Insurance

Types of Life Insurance

Term Life Insurance

Life insurance is a contract between an insurance company or government that guarantees compensation with a specified premium amount during the loss of life. Life insurance provides financial protection to surviving dependents after the death of an insured.

Life insurance can be divided mainly into two types – term and whole life.

Term Life Insurance

Term life insurance is the most basic and less expensive type of life insurance for a set period of time, typically 20 to 30 years. These policies can be renewed at the end of each year and expire around your retirement age. Some insurance policies guarantee a fixed premium each year, while others typically start with lower premiums but rise over time.

Whole Life Insurance

This policy has death benefits as well as cash value. In this, the premium you pay monthly or annually adds on to the cash value. Some people use these policies as a tax-advantaged way to build retirement savings or have their estate avoid probate taxes, as an investment. In whole life insurance, the cash value grows over time and, you are eligible to withdraw funds from this.

The “face amount” of Whole Life insurance is the amount of the benefit that will be paid after death. 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.

Types of Whole Life policies

  • Indeterminate 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 financial strength of that company because that helps ensure that they will be able to honor your policy. You can get approved for whole life policies through a simplified issue, guaranteed issue, or fully underwritten plans. Simplified issue policies only require you to answer some medical questions, and guaranteed issue plans do not have any requirements to fulfill. Fully underwritten plans usually have a longer process that requires a medical exam.

Universal Life Insurance

Universal life insurance is similar to whole life insurance with more flexibility and high cash value. In this, the policyholder has an option to change the premium and policy amount. This flexibility makes universal life insurance more attractive, but they are quite complex to understand. A qualified insurance agent can help you to understand these policies better.

Accidental Death and Dismemberment

Many companies offer Accidental death and dismemberment insurance to all its employees. It provides coverage that protects against accidental death or specific serious injuries such as limb loss or paralysis.

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 renew annually. Premiums change annually, as well.

Four types of AD&D insurance

  • Group life supplement
    AD&D coverage is incorporated into a group life insurance policy provided by your employer.
  • Voluntary
    An individual benefit that you can choose to add to your insurance coverage independent of any employer insurance coverage.
  • Travel accident
    Offered to employees who travel extensively for corporate business. This policy can be incorporated into your benefits plan by your employer.
  • Dependents
    Provides coverage for dependents.

AD&D insurance may be beneficial if you are concerned about your death or becoming 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 a 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 Insurance

 Term Life InsuranceWhole Life InsuranceUniversal Life Insurance
Pros
  • Low cost
  • You can get a high coverage amount for low premiums.
  • You get guaranteed lifetime coverage as long as you pay the premiums
  • It builds cash value
  • Builds cash value
  • Less expensive than whole life
Cons
  • Does not build any cash value
  • Post-term you need to renew the policy and premiums may become unaffordable
  • Most expensive
  • Does not provide any flexibility with the premium amount
  • The policy may lapse without proper funding
  • Expensive when compared to term insurance

If you are looking for something that will pay off your debts and replace your income when you’re gone, term life insurance can be the best choice. However, if you have other financial goals and you want to be covered for your entire life, then whole life and universal life insurance can be considered.

Life Insurance Benefits

The most important benefit of life insurance is it helps support your family and your loved ones who rely on your income. Life insurance can help you pay other medical expenses or debts you may have. It 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 incomes from an estate that usually takes several months before a probate court approves them.

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.

Things to consider before buying Life Insurance

Before buying life insurance, think about how much life insurance you need? How long you need? 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 happens to you?
  • Do you have any debts or expenses that your family would have to pay if you pass away?
  • Do you have any 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?

Research thoroughly and decide which life insurance can best suit your needs. Term Life covers you for a set period 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 a much higher cost.

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.

Bottom line

We all know how important life insurance is, but still some people choose to ignore it. Death is unavoidable and some times accidental. Leaving behind a lot of financial expenses can be devastating to your family.

You might find it challenging to choose the right life insurance. Take guidance from a reliable insurance agent, check your financial goals and available options to make the right choice.

Frequently Asked Questions

Is the my term insurance renewable?

Term policies can be “renewed” after the initial term of 5 to 30 years as it expires, but it 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 or health.

Is my short-term policy convertible?

Some short-term life insurance policies can be changed into a long-term plan without requiring any additional information or medical exams. This can help if you’re trying to minimize the present cost 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.

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 employer provides your life policy and you no longer work for that company, your life insurance coverage can end. Some companies allow you to “take your policy with you” as long as you continue to pay the premiums.

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 even 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.