The proceeds from life insurance – which are received by the beneficiary free of income tax – can be used for a wide variety of needs. These can include the payoff of debt, the continuation of living expenses, and / or for paying the funeral and other final expenses of the decedent.
While there used to be just a limited number of policy options that were available, today, there are many different types of life insurance that can be purchased. Yet, even though the variety of alternatives can help an individual to better customize the coverage for their needs, it can also be somewhat confusing when shopping for the best policy. Therefore, having a good understanding of the different types of life insurance that are in the marketplace today can be helpful.
Types of Life Insurance
Today, there are numerous types of life insurance to choose from. But, when looking at the array of available options, there are just two key categories of life insurance coverage. These include term and permanent.
With term life insurance, the policyholder is covered by death benefit protection only.
Other components, like cash value or investments, are not affiliated with term life insurance – and because of this, these types of life insurance policies are often very affordable.
Term life insurance is typically purchased for a specific number of years that the policy will last. There are also 1-year renewable term life insurance policies that are available via many life insurance companies.
Typically, the amount of the coverage will be locked in – as is the premium amount – for the duration of the term insurance policy. It cannot be changed unless the insured chooses to modify it, or misses his/her payments and the policy lapses.
Permanent life insurance will offer both a death benefit and a cash value component. The death benefit amount will often be locked in, as well the amount of the premium. The cash value will be a common interest rate, plus, in some cases, dividends. Everything will accumulate just like a 401(k), where the taxes are deferred.
The policyholder is allowed to either withdraw or borrow from the cash value account. These funds can be used for paying off debt, or another other need that the individual sees fit to use it for. While is it not required that these funds are paid back, it’s important to note any un-repaid balance in this account will count against the amount of the death benefit that is paid out to the named beneficiary at the time of the insured’s death.
When analyzing either term or permanent life insurance coverage, there can be many different policy options to choose from. Because of this, it can allow the type and the amount of protection to better match an insured’s specific needs.
Types of Term Life Insurance Coverage
Term life insurance is the simplest type to understand, since it’s the most basic. It’s a direct exchange of a premium payment for the protection of a stated death benefit amount.
These can include the following.
Level Term Life Insurance
With a level term life insurance policy, the amount of the death benefit will remain the same over the entire lifetime of the policy. The amount of the premium that is paid in will also typically be locked in.
Renewable Term Life Insurance
A renewable term life insurance policy can be renewed by the policyholder after each “term,” or time period has gone by. This can be accomplished without the need to fill out a brand new application for coverage. It is also not required for the insured to undergo a new medical examination. The premium amount, however, will usually go up at each renewal period. This is due in large part to the older age of the insured.
Convertible Term Life Insurance
Convertible term life insurance will allow the policyholder to “convert” the term policy over into a permanent form of life insurance protection. Here, too, there is usually no need for the insured to prove evidence of insurability, or to go through a medical examination – provided that the premiums have continued to be paid and that the conditions of the policy have been met.
Decreasing Term Life Insurance
A decreasing term life insurance policy is a type of term life insurance coverage where the amount of the death benefit will decrease over time – until it eventually reaches zero. (The premium amount, will usually remain the same). These policies can be used with those who are covering the payoff of a home mortgage, where the balance that is due decreases over time.
Increasing Term Life Insurance
As its name implies, an increasing term life insurance policy is one in which the amount of the death benefit will increase over time. However, the amount of the premium will oftentimes remain the same, though.
Reentry Term Life Insurance
In most cases, an insurance company will usually charge a low amount of premium for term life insurance – especially during the first several years that the policy is in force. Life insurers will often charge the policyholder somewhat low premiums in the first several years after issuing a term life insurance policy.
On average, insureds will tend to remain in good health for at least the first several years after life insurance policies have been issued. But, over time, there may be some healthy policyholders who will drop their coverage while others who are in poor health will keep theirs.
In order to help with offsetting of this trend, life insurance carriers have to build additional renewal premium charges into the policy – especially in the later years of the coverage – to help in covering the additional mortality cost that is associated with this adverse selection. If a policyholder is in good health, he or she may apply for new life insurance coverage by showing evidence of insurability, and they can once again enjoy the lower mortality charges that are associated with the newly issued policy. If you are concerned about your age and want to know if you qualify for life insurance for seniors, we can answer your questions and help you get the coverage you deserve.
With that in mind, some insurance companies will offer reentry term life insurance policies. In this case, provided that an insured continues to show evidence of insurability at periodic intervals, his or her renewal premiums will remain comparable to the premiums for newly issued term life insurance policies.
But, if the insured is not able to qualify for the lower amount of premium, then many of these types of policies will have a maximum amount of premium that may be charged by the insurance company. You can learn more about individual insurance companies by checking out our company reviews, such as our Colonial Penn Review or Globe whole life insurance review.
Final Expense / Burial Life Insurance
Final expense insurance is a form of life insurance coverage that covers the cost of burial, a funeral, and other related costs such as flowers, transportation, and announcements. Often called “funeral insurance” or “burial insurance,” final expense usually provides a benefit of between $5,000 and $50,000. These policies are frequently purchased by those who are age 50 and over.
Types of Permanent Life Insurance Coverage
As with term life insurance, there are also many different types of permanent life insurance coverage. This can also help with better fitting the insurance protection with the specific needs of the insured.
Whole Life Insurance
Whole life insurance is a type of permanent life insurance that are intended to stay in force throughout the “whole” life of the insured, or until the policy pays out. It is the simplest form of permanent life insurance.
This type of policy has a death benefit that will usually remain the same over time. It also has a cash value component that will grow by a set percentage over time. The interest rate is set by the insurance carrier.
In some cases, whole life insurance policies may also offer a non-guaranteed cash value element that is made up of policy dividends or excess interest. The combination of the general cash value portion with the non-guaranteed cash value build up can enhance the value of the policy over time.
Universal Life Insurance
A sort of “in-between” policy is called universal – aptly named since it can be used for a very wide range of scenarios.
In a nut shell, it’s a level premium, but can last much longer than term. While it does have cash components like whole life, it builds up slowly over time, only to pay the difference in premiums in later years; in other words, the cash will deplete itself to keep your premiums the same.
Variable Life Insurance
Variable life insurance is a form of permanent life insurance policy. These policies offer a component with permanent death benefit proceeds to the insured’s beneficiary upon death. With variable life insurance, the death benefit may increase or decrease – however, it will not go below the guaranteed minimum amount – which is typically the original amount of death benefit that is purchased.
However, in addition to this permanent protection, variable life policies also feature an investment component. In fact, these policies are referred to as “variable” because when premiums are paid into the plan, the portion that is allocated to the investment account will be subject to the fluctuations of the market.
Variable Universal Life Insurance
Variable universal life insurance is similar to traditional universal life, except that the policyholder is allowed to invest the cash portion of their policy into different types of investments such as mutual funds. There is no guaranteed minimum cash value in a variable universal life insurance policy.
Indexed Universal Life Insurance
With indexed universal life insurance, the growth of the cash value component is based on an underlying index, such as the S&P 500 or the DJIA. In this case, however, while the principal can increase during up periods of the index if the index suffers a loss in any given year, the cash value component will just simply be credited with a 0%. Therefore, the funds that are in the account will be protected and not subject to market loss.
Joint and Survivor Coverage (Last to Die)
Joint and survivor life insurance policies also cover two lives. In many cases, these policies are used to insure two spouses. With a joint and survivor policy, benefits are not paid until the survivor – or the second person to die, passes away. These policies are oftentimes referred to as “last to die” coverage.
A joint and survivor policy can be either term or permanent coverage. Often, this type of policy works well for couples who possess sizeable assets, allowing them to ensure that the largest part of the estate is left to heirs by helping to pay for estate taxes or pay off business-related debt.
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