Life Insurance
Life insurance is a lifeline that protects your family in the event that you are not there to provide for them. It helps your loved ones in their time of need when events turn in a downward direction.
By purchasing life insurance today, you can take matters into your own hands to ensure the continuity of your legacy in the future. Knowing the different types of life insurance policy coverage cam help you be informed when the time comes to make a decision.
Life Insurance Benefits Everyone
Purchasing a life insurance policy gives you valuable peace of mind while benefiting many people around you, including:
Spouses: Life insurance ensures your spouse has a safety net and is covered from any shared debt. The right policy also frees your spouse from overwhelming medical bills or funeral expenses at a time when they need help the most.
Children: The costs of raising children are high, and they continue to grow. The right life insurance plan makes sure they are taken care of from birth to adulthood.
Homeowners: Buying a home is one of the most significant purchases an individual can make. Taking out an insurance policy for the life of your mortgage ensures that payments are made and that your loved ones are protected from debtors.
Life Insurance Definitions
Let’s first start with some definitions that will help you navigate this guide:
Premiums: Premiums are payments made towards an insurance policy.
Beneficiary: A beneficiary is an individual or group of people selected by the insurance policyholder to receive the death benefit.
Death benefit: The amount of money paid out to the life insurance beneficiaries after a policyholder passes on.
Cash value: The value of a whole life insurance policy in cash. This accrues over time from a portion of the premiums and works like an investment or savings account.
Types of Life Insurance
Whole Life Insurance
Whole life insurance is permanent life insurance, and it provides long term coverage for the entire duration of your life. Upon your passing, it pays a death benefit to your beneficiaries provided you made sure to pay the premiums throughout the entire policy.
Part of the premiums that are paid into the policy go into a savings component with a fixed rate of interest that increases in value over time. This savings component is a primary reason for why whole life policies are more expensive when compared to term life policies that have similar coverage.
A major benefit to having a whole life policy with a cash value is that the policy owner can take out a loan based on the value of the policy. If the policyholder passes away before the loan is paid, the remaining amount is withdrawn from the death benefit paid out to the policy beneficiaries.
The growing cash value of your policy does not affect the death benefit paid to beneficiaries after the policyholder passes on. In rare cases where the policy owner lives past a set age (typically 100 or 120), the cash value may exceed the death benefit. In those circumstances, the insurer often pays out the coverage amount in full and terminates the policy.
Term Life Insurance
Term life insurance covers a predetermined number of years and pays out benefits provided that premiums were paid throughout the term. Term insurance typically costs less than whole life insurance because there is no cash value component.
Term life insurance can be renewed every year with a new rate based on the policyholder’s age and health. Accordingly, some companies offer decreasing term insurance where the coverage decreases at a predetermined rate over the life of the policy.
Universal Life Insurance
Universal life insurance is a type of permanent life insurance. It provides coverage throughout your life so long as the premiums are paid for the policy’s duration. Unlike whole life insurance, universal life insurance offers some flexibility, allowing you to increase or decrease the death benefit amount in addition to adjusting monthly premiums.
Variable Universal Life Insurance
Variable universal life insurance is a type of permanent life insurance with a tax-free death benefit paid to beneficiaries. Unlike whole life insurance, this death benefit is not set at a guaranteed amount because a specific portion of the cash value is invested in various investment instruments such as a mutual fund offered by the insurance company.
Many individuals choose variable universal life insurance because it offers more interest than a standard whole life insurance policy with a fixed interest rate. The tradeoff is increased risk exposure to market fluctuations. These may cause the fund to underperform and affect the cash value of the policy.
Indexed Universal Life Insurance
Indexed universal life insurance is a type of universal life insurance where the cash value interest rate is set to the performance of an index such as the NASDAQ or S&P 500. These policies have a guaranteed minimum interest rate that is neither fixed nor varied.
The gains are determined by a formula set by life insurance companies. Risk-tolerant individuals often favor this type of policy because the cash value account typically grows or contracts at a different rate when compared to regular universal life insurance policies.
Guaranteed Issue Life Insurance
Guaranteed issue insurance is a type of whole life insurance that does not require a medical exam. It is typically geared towards older individuals or those with health conditions that do not qualify for other types of life insurance coverage.
Premiums are often higher and death benefits are typically lower with guaranteed issue life insurance. Since it does not require a medical exam, coverage amounts for this type of insurance are usually lower as well.
Final Expense Insurance
Also known as burial or funeral insurance, final expense life insurance is purchased by individuals to cover final medical bills and funeral expenses. This type of insurance is typically geared towards individuals that are not eligible for traditional coverage. It does not require a medical exam and is suited for people with severe health conditions that earn a low income with few or no assets.
Simplified Issue Life Insurance
Simplified issue life insurance typically falls under the whole life insurance category. Favored by individuals requiring immediate coverage, the application process does not require a medical exam and uses a health questionnaire during the screening process.
Coverage amounts for simplified life insurance are usually higher when compared to final expense insurance. Any premiums, death benefits or other details are based on a risk assessment set by the issuing company.
Indexed universal life insurance is a type of universal life insurance where the cash value interest rate is set to the performance of an index such as the NASDAQ or S&P 500. These policies have a guaranteed minimum interest rate that is neither fixed nor varied.
The gains are determined by a formula set by life insurance companies. Risk-tolerant individuals often favor this type of policy because the cash value account typically grows or contracts at a different rate when compared to regular universal life insurance policies.
Along with higher premiums, another major drawback with simplified issue life insurance is that applicants can be denied by insurers based on the results of the screening process.
Group Life Insurance
Group life insurance is offered to employees by an employer as part of a benefits package. Premiums are usually paid every month and covered fully or in part by the employer.
Along with subsidized premiums, employees benefit from a group policy because it’s easier to get approved and it decreases the amount of private life insurance they need to purchase on their own. Drawbacks include smaller death benefits, a lack of customization, and the inability to keep the plan should they leave the employer.
What types of insurance don’t require a health exam?
Life insurance typically falls under two main categories: whole life/permanent life and term life insurance. Whole or permanent life insurance lasts for your entire life, while term life insurance is valid for the duration of the specified term outlined in the policy agreement. Does term life insurance have a savings component? No. Unlike whole life insurance, term insurance does not have a cash component that can be invested over the course of the policy.
Life insurance typically falls under two main categories: whole life/permanent life and term life insurance. Whole or permanent life insurance lasts for your entire life, while term life insurance is valid for the duration of the specified term outlined in the policy agreement. Does term life insurance have a savings component? No. Unlike whole life insurance, term insurance does not have a cash component that can be invested over the course of the policy.
Variable universal life insurance takes a portion of the cash value of the insurance and invests it in funds offered by the issuing company. Indexed universal life insurance sets the cash value interest rate to the performance of an index such as the NASDAQ or S&P 500.
Simplified and guaranteed issue life insurance typically do not require an exam. Premiums and benefit amounts are usually determined through a health questionnaire during the application process.
Comma Insurance can help you understand your choices among the various types of life insurance and build a plan that fits your lifestyle, budget, and needs so you can be confident in the financial legacy you leave behind you.
Contact us to learn more.
