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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