Many people get very squeamish when the topic of life insurance comes up. After all most people are simply uncomfortable and saddened by the idea of their own death of the deaths of their loved ones. That is certainly very understandable; however, unfortunately death is an inescapable part of life and pretending it won’t happen isn’t going to do anyone any good. In fact if you are not well prepared with the proper life insurance coverage that you need, then you may end up leaving your loved ones in a very dire situation. Far from being thought of as morbid, life insurance should be considered a means of securing peace of mind and ensuring that though your loved ones will suffer an emotional loss at the time of your passing, you will at least not impose a financial loss as well. With that said, let’s take a brief look at some of the most common types of life insurance policies.
In simplest terms life insurance can be broken down into two distinct categories: permanent or temporary. As the names imply, permanent life insurance provides enduring coverage for as long as the payment continues. By contrast temporary life insurance provides a death benefit for a set number of years and then expires. Let’s take a look at the temporary type first. This is known as term life.
Term Life Insurance
Term life insurance provides a specified amount of coverage for a specified number of years. The most common number of years are generally 10 year term, 20 year term, or 30 year term. However, you may occasionally see the years in 5 year increments as well. Thus 5 year term, 10 year term, 15 year term, etc. Beyond the terms themselves, there are also two classifications of term life insurance:
This type of term life insurance offers a stable, uniform death benefit for the entire life of the term. In other words your beneficiaries would receive the exact same payment upon your death whether you are only 1 day into the policy, 1 year, right in the middle of the term, or 1 day from the expiration of the term. This is by far the most popular, common type of term life insurance.
This type of term life insurance is much less popular with consumers and not nearly as often seen. The way it works is that the death benefit decreases over time. Thus if you die in the first year of the term your beneficiaries would receive a greater benefit than if you die near the term’s expiration. Most often the death benefit does drop in one year increments.
Permanent Life Insurance
As mentioned above the other major classification of life insurance is permanent life insurance, which never expires on the insured party as long as they continue to pay their premiums. Instead the policy will continue to pay a death benefit regardless of when the person dies. The major types of permanent life insurance are:
This is the most common type of permanent life insurance and also the most easy to understand. The way it works is that a set death benefit and premium are agreed upon and then the insured party continues to pay that premium until age 100. Naturally of course most people die prior to age 100 and thus when they do die, regardless of how long they have had the policy be it a few days, a few years, are several decades, they will receive the full death benefit as agreed upon.
If the insured party does not die prior to age 100 and still owns the policy then the policy will ‘mature’ and the person will receive the benefit at that time. Thus it is actually possible to receive a life insurance payout without dying!
In the meantime your policy is gradually accruing a cash value. That means that after paying on the policy for several years it will be worth a particular amount of money. The cash value can be withdrawn from the account. Because of this feature it is true that these types of policies have limited use as a savings vehicle and they are often marketed this way.
This is another very popular type of permanent life insurance. It varies from Whole Life Insurance in that you may be able to increase the death benefit if you pass a medical exam. The cash value built up in the account also generally earns a money market rate of interest. Plus, you may be able to adjust the premium amount due every month by using up the money in your account which you have accrued. That may allow you to lapse payments for awhile and this can be very beneficial to consumers whose economic circumstances change suddenly. However you should always consult your insurance agent prior to stopping premium payment or for more information about your other options.
This type of permanent life insurance takes the savings account and money value of the account a step further. With a variable life insurance policy you are able to invest your cash value in stocks, bonds, and mutual funds. In this way it is very similar to a brokerage account. Thus you are potentially able to build your cash value even faster in a variable life account if your investments do well. However, there is also more risk involved and if your investments do poorly you could lose some or all of the cash value in your account.
As you may have guessed based on the name this type of policy is a hybrid between the Universal Life and Variable Life policies. Thus you get the investment possibilities of a Variable Life account combined with the more flexible premium and death benefit structure of the Universal Life account.
All in all there are quite a few excellent ways to get life insurance coverage. It is important to be well informed about these different types of policies and to make a decision based on your needs, goals, and economic situation. With a little preparation and forethought you can leave your loved ones with a legacy rather than a financial burden.