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Types of Life Insurance

 

What Are the 3 Main Types of Life Insurance?

A photo of magnifying glass on top of a paper that reads Insurance Policy and a hundred dollar bill

Whole Life Insurance

Whole life insurance is the most common and is what most people think of when they hear the term permanent life insurance. It offers lifelong coverage and a cash value built up over time. This type of life insurance benefits people who need lifetime coverage, but it may not be for everyone. This cash value can be used to make payments on premiums, purchase additional insurance, and even take out loans. The cash value stays with the insurance company when the policyholder dies, but the death benefit is reduced if you take out a loan against it. You can take advantage of this and cash in the policy and take the cash value out, but the policy ends. In most cases, cash value insurance is more expensive than term life insurance.

Term Life Insurance

Term life insurance is the simplest and least expensive type of coverage. It is ideal for those with limited funds or only temporary needs. It pays the policyholder's beneficiaries the face value of the policy if the insured dies. Term life insurance provides coverage for a set period of time of 1 to 30 years. When the specified term ends, unless it’s a renewable term policy, the cost of the policy will usually increase dramatically, and it is often better to get a new policy if the insured wants to continue coverage.

Annual renewable term insurance can be renewed yearly without needing a medical exam or proving insurability. This type of policy is useful if you are looking for a low-cost option and need coverage for only a short period of time.

A return of premium policy is a term policy where the premiums are returned if the policy isn’t used. The premiums can be refunded if the insured lives longer than the specified term. The policy may be renewed, however, the premiums may be higher during the renewal period.

Universal Life Insurance 

A Universal Life Insurance policy offers lifelongcoverage, along with flexible premium payment options. The policy is usually
tied to an investment, and the insured controls the policy's cash value. That
value increases based on the performance of the insurer's portfolio and may be used to cover premium payments. Variable Universal Life policies can lose cash value, but you can purchase a Guaranteed Universal Life without being exposed to the risk.

There are many options for customization ofUniversal Life insurance policies that may allow policyholders to choose a flexible premium or even skip payments , however the policy could lapse if the premium balance becomes too low.

The premiums of these policies are determinedby underwriting, which is the process used by the life insurance company to
determine how much risk the insured poses. A note of caution, the premiums of this policy can increase as you grow older, so the cash value may be used to cover the premium.

How Does Life Insurance Work?

If you're wondering how life insurance works, you've come to the right place. The main types of life insurance policies are Whole Life, Term life, and Universal life insurance. Here's how each type works, and remember, you can customize your policy to meet your needs and your family's financial situation. Once you've chosen the type of policy, you can decide how much coverage you need.

The next step is for you to pick your beneficiaries and fill out that form and submit it to the insurer. If approved, your heirs will receive the death benefit you specified should you pass away during the specified term.

Whole life

A  shocked baby asking a parent ihey bought insurance for their cell phone, but no insurance for protect your family?

Whole Life Insurance Pros and Cons

Pros 

Stability:

Whole Life Insurance is permanent coverage policy that can provie guaranteed cash values and death benefits. The insured's spouse and children can be co-beneficiaries.

Tax Free Cash Value:

One of the most significant benefits of Whole Life insurance is that the cash values grows tax-free, which can make it a valuable addition to a retire nest egg. It allows for withdrawls or loans from it without tax implications.

Guarantees:

The cash value of a Whole Life policy can be guranteed to increase at a specific rate, depending on specifications of the policy.

Lifelong coverage:  

Whole life insurance is a good option for people who need permanent coverage. It will ensure that beneficiaries receive their death benefits no matter how long they live. In addition, it can help them avoid selling their assets after their death.

Cons

Cost:

The downside of whole life insurance is that it can be more expensive than other types of policies. For example, a survey conducted by Consumer Reports found that Whole life insurance premiums were up to 10 times more expensive than the premiums for a term life insurance policy that pays the same death benefit. It also doesn't have much flexibility in terms of cash value growth.

Inflation:

With a whole life insurance policy, you receive interest on the cash value of your account. The interest rate is usually 1% to 4% depending on the policy. When inflation levels rise, the amount of interest you earn may be offset by rapid increases in the cost of living.

Lack of flexibility:

Your life insurance needs may change as you age and your family grows. Whole-life policies lock you into a fixed death benefit that may become too small over a long period.

Term Life

A photo of a stethoscope on top of a stact of 100 dollar bills

Term life insurance is a policy that requires premium payments. The premium amount depends on your age and health. When you purchase term life insurance, you are paying for a policy that will last for a specific amount of time. When you buy life insurance, you might be required to submit to a medical examination depending on the type of policy you apply for, medical or non-medical. During this time, your insurer will review your driving record, prescription drug history, smoking history, hobbies, and family medical history.

Term life insurance is a less expensive option than whole life. However, since it has a limited duration, it has fewer benefits than a permanent life insurance policy. In addition, term policies do not build up a cash value, like Whole Life insurance. The policy will cover the insured throughout the duration of the policy, however, when the term is over, the premium on the policy usually increases dramatically. The exception to this is an Annual Renewable Term Life policy.

Pros

Cost:

Term Life Insurance is a relatively inexpensive way to provide financial protection for your loved ones.


 Great for starting out:

Term Life Insurance is a popular choice for young families because it costs less than whole life insurance.

Final Expenses:

Seniors may also find term life insurance advantageous because it helps to cover final expenses.

Coverage for the time you need it:

It pays out benefits upon your death within a specific period.


Stability:

The premium will usually stay level except in special cases.

Cons  

Temporary coverage:

The policy will only last for a specified period of time and then expire.  

No cash value:

The money that you pay towards the premium doesn't build cash value unless you have a return of premium policy which is more expensive. 

Universal life

Universal life insurance lets policyholders vary the premiums. Over time, the policy accumulates a cash value that can pay for unexpected expenses. The policy will also accrue tax-deferred growth. It’s important to understand that with a Universal life insurance policy, even if your premium remains steady over time, the underlying cost to insure you rises with age. In the early years of a universal life policy, part of your premium pays this expense, typically called the mortality charge or insurance cost. In later years, your payments alone may not cover the increasing expense, and the shortfall will come from your cash value.

The primary purpose of a Universal life insurance contract is to pay out a death benefit. However, the policy's cash value can increase according to the stock vehicle assigned. There are also fees involved with universal life insurance, including investment management fees, surrender charges, and mortality and risk charges. It also includes optional riders that are available to be added to the policy.

Pros:

Flexibility:  

Universal life insurance is a type of permanent life insurance that combines flexibility, tax advantages and liquidity. It will still have the same death benefit guarantees as Whole Life Insurance.

Cash Value:

It also has the ability to build up cash value in the policy that is accumulated tax-free.

Payment Options:

It is a permanent type of coverage that can be bought and paid for through monthly premiums or in one lump-sum payment.

Coverage Amounts:

You can choose how much coverage you want at any time and increase or decrease it as needed, along with the premium amount.


Cons:  

High fees:  

Universal life insurance has higher fees than term life or whole life policies due to the extra features included in these policies, such as the ability to adjust premiums.

Premiums:

The policy could lapse if minimum premium payments aren't made, and the policy's cash value gets too low. If you stop making payments, the policy will eventually lapse.

 

Exclusions in life insurance policies

Life insurance policies have certain exclusions for specific situations to protect the insurance company, for example, suicide. This is typically limited to the first two years of your policy, so people won't benefit by purchasing a policy with possibly defrauding the company in mind. Another common exclusion is for war or acts of terrorism. Other standard exclusions exist, such as extreme hobbies and health problems.

Some standard exclusions in life insurance policies include death due to a pre-existing health condition. Your pre-existing condition must have been known to the company when you applied for the policy. In addition, life insurance policies exclude the deliberate risk caused by a criminal act. 

 

How a Life Insurance Calculator Can Help You Decide How Much Coverage You Need

An image with +, -, x, and = with Life Insurance Needs Calculatior across the top

Life insurance is an important aspect of any financial plan, and a life insurance calculator can help you decide how much coverage you need. Many factors affect the premium you pay for life insurance. In some cases, a final expenses calculator can help estimate how much money you'll need to cover final expenses. Please note that the results of calculators are approximate and depend on the information you input. There is no guarantee that you'll be approved for any specific policy amount or coverage.

Another factor to consider is the value of your assets. For example, if you have $600,000 in assets, you may need to purchase a term life insurance policy that covers these assets. In other words, you need $600,000 worth of coverage to ensure that your family won't be left with these debts. This can help estimate how much coverage you need and what it will cost you. The life insurance calculator can give you the needed numbers in about five minutes.

Written by Bill Ware 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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