Life insurance is an essential part of financial planning. The main reason for buying it is to make sure there is some compensatory income for the legal beneficiaries left behind following the death of an individual. Some limited-term life insurance policies are also an investment tool, which has a cash value when they mature but also pays out a lump sum should the holder die before the maturity date.
Before buying this type of inusrance you need to consider which policy is going to meet your needs at a price you can afford. Once you have decided on the type of policy, the most popular options are described in detail below, you need to then find the insurance company that is offering what you need at the lowest cost. When considering the cost you must also factor in variables such as the potential payout value of the policy, policy terms, conditions and exclusions, and early surrender penalties.
6 Basic Types of Life Insurance
There are six basic types of Life Insurance and it is essential that you choose the one that is most appropriate to your circumstances and needs. See other Insurance Options.
- Term Life Insurance
- Endowment Life Insurance
- Whole Life Insurance
- Variable Life Insurance
- Universal Life Insurance
- Variable Universal Life Insurance
Term Life Insurance
Term life insurance provides life cover protection for a term of one or more years. Some companies offer policies with terms of up to thirty years. The premiums payable on term insurance policies remain the same throughout the life of the policy. Its policies have no cash value at the end of the cover period. They pay out only if the holder dies within the time period covered by the policy. These insurance policies generally provide proportionally larger payouts than other policies on the death of the policyholder.
Some term life insurance policies are renewable for one or more additional terms even if your health has deteriorated. However, each time you renew the policy, premiums will be higher.
Term Insurance Explained
As the name implies, Term life insurance provides coverage for a specified period of time, the term of the policy, which typically ranges from five to thirty years. It is possible to renew these policies but the premium is adjusted to take account of increased age and changes in health. Term life insurance policies payout only on the death of the policyholder within the time period covered by the policy. Your policy is paid out only upon death within the prescribed period of time. These policies have generally lower premiums than other types as there is no savings or investment element in the premiums paid.
Term life insurance policies do vary and you need to select the one that meets your specific needs. The most common type taken out is level term insurance. Here the benefit payable to the beneficiary on the death of the holder is set, and the premium installments are fixed for the duration of the policy. These term life policies are often used to provide protection for families until their children reach a certain age, usually 18 or 21. They are also an affordable means of protection until such time as the holder is in a position to convert to whole life or universal policy if that is their longer-term aim.
Decreasing term life insurance is generally sold with a fixed premium, but a decreasing level of the death benefit as the policy approaches its cut off date. A common use of decreasing term insurance is to cover the cost of a remaining mortgage, with the benefit payable on the policy designed to decrease at the same rate as the outstanding balance on the mortgage. These types of policies are often taken out alongside whole and universal life policies, as part of a protection plan in which the whole or universal life policy is the core element. Your own needs and circumstances will influence your decision as to whether a decreasing term policy is appropriate for you.
Finding the right package can be a complex process as there are so many policy option variations and riders out there. Rates vary from company to company and state to state, and people have different requirements according to their circumstances. An experienced professional insurance agent can be a great help in assisting you to find the best coverage at the best price for your specific needs.
Life Insurance “Endowment”
An endowment insurance policy has an assured cash value on maturity at the end of the term of the policy. It can also have value-added as the insurance companies invest in endowment policy funds and profits made can be shared with policyholders. With endowments, the premiums paid are higher than with whole life, and on the policy reaching its payout date, there is a guaranteed sum assured to the holder. However, in the event of the policyholder’s death before the policy matures, the amount payable to beneficiaries can be proportionally lower than with some other life policies.
Endowment Insurance Explained
Endowment insurance policies combine savings with life insurance. The premiums are generally quite high because they include a saving element. The aim of the policy is to generate a cash sum on the policy maturity date or sooner should the policyholder die within the period covered.
Endowments include savings with insurance in order to meet personal finance needs such as the costs of college education, mortgage payment or to provide a retirement fund. They lost popularity through the 1970s and 80’s when higher interest rates became available from competing savings products. Although the balance has been substantially restored it has not recovered their former popularity.
It is always advisable to discuss your life insurance needs with a reliable professional agent who can advise on how to get the best value from your available funds, and whether you should choose term, whole life or variable.
Whole Life Insurance
Whole life insurance gives protection for the lifetime of the policyholder. The most common type is called straight life or ordinary life insurance. With this, you pay the same premiums for as long as you live. These premiums can be substantially higher than you would pay when starting a term insurance policy of the same payout value. However, you would eventually pay much more if you were to continually renew a term insurance policy into your later years.
Some whole life policies allow you to pay premiums for a less than whole life period such as 20 years, or until age 65. Premiums for these policies are higher because the premium payments are set for a fixed period.
Whole Insurance Explained
Whole life insurance provides fixed premium permanent protection to the policyholder, usually to age 100. The policy will not lapse as long as sufficient premiums are paid to keep it in force. The premiums also contain a savings element. This is invested by the company, and interest earned can top-up premiums paid. The cash value stored in the policy can be used to complete all necessary premium installment payments early or act as security against a policy loan. Loan funds are repayable and can be used for almost any purpose.
Premiums may initially be higher than you would pay for the same level of term insurance cover. However; they do not increase. Whereas with term insurance you can find the premiums increase significantly on each renewal.
Whole life insurance policies are usually appropriate where you need to provide for longer-term financial security. They can help fund retirement or provide income for a surviving beneficiary. It is important to take professional advice when considering options.
Variable Life Insurance
Variable life insurance provides protection to the beneficiary on the death of the policyholder. This type of policy is ‘variable’ because a proportion of the holder’s premium dollars are allocated to a separate investment account. This means the cash value and death benefit payable can fluctuate up or down. Most variable insurance policies guarantee that the death benefit will not fall below a specified minimum. However, the minimum cash value on the investment portion is not usually guaranteed. Variable insurance is a form of whole life insurance and because of associated investment risks, it is also considered a securities contract. It is regulated as securities under the Federal Securities Laws and must be sold with a prospectus.
Variable Insurance Explained
Variable life insurance is a form of whole insurance in which a part of your premium payment is allocated to a portfolio of investments held by the insurance company, according to your choice. While a minimum death benefit is usually guaranteed, the risk is with the policyholder and if your investments perform poorly the death benefit payable and the cash value of the policy can decline. This could mean you find yourself having to pay more than you can afford to keep the policy in force.
If the investments perform well, interest earned can be allocated against premiums to reduce the amount paid. Cash value and death benefit can also increase. Because Variable life insurance carries an investment risk it is regarded as securities under federal Securities Laws and must be sold with a prospectus.
Care must be taken when investing in a Variable life insurance policy, and guidance should be sought from an experienced professional agent. They will help you get the policy that promises the best performance, but remember the risk is ultimately yours.
Universal Life Insurance
Universal Life insurance is a variation of Whole Insurance. With this type of policy, a portion of the flexible premium payments is invested by the insurance company into a combination of mortgages, bonds, and money market funds. There is usually a guaranteed minimum interest rate applied to the policy, so a return is guaranteed to the policyholder. However; if only the minimum designated premium installments are paid, while the policy will stay in force for its lifetime, they would not normally be sufficient to build up a substantial cash value.
Universal Insurance Explained
Universal life insurance is similar to a whole life policy but it has an investment element attached. There is also some flexibility in the policy as premiums and the death benefit payable can be varied as your circumstances change. Premium payments made in excess of the cost of insurance are invested. Interest is paid on this investment and added to the cash value attached to the policy. There is also usually a guaranteed minimum rate of interest (usually 4%) fixed by the insurer, so the investment is as safe as it can be.
Flexibility is a major advantage with a universal life insurance policy, particularly for families who may find they have fluctuations in their ability to pay premiums. On the downside, if premium payments are too low for a long period, the policy could lapse leaving the holder without insurance protection. It is important to talk to an experienced professional advisor when considering your life insurance needs.
Variable-Universal Life Insurance
Variable universal life combines the features of Variable and Universal life insurance. It gives flexible premiums and adjustable death benefits. The amount of the death benefit is dependant on the success of your investments. If the investments perform poorly or even fail, there is a guaranteed minimum death benefit paid to your beneficiary upon your death. Variable universal gives you more control of the cash value account portion of your policy than any other insurance type and substantial cash value can be built up. This is not by any means assured and the policy owner assumes the investment risk. Variable Universal products are regulated as securities under the Federal Securities Laws and must be sold with a prospectus. Learn More.
Variable Universal Insurance Explained
As the name suggests variable-universal insurance blends the features of variable life and universal life insurance. These policies give flexible premiums, allow for the adjustable death benefit and include an investment element.
With VUL insurance the investment part of the premium is in the control of the policyholder and there is potential for significant financial returns. At the same time, the policyholder also takes all the risk. These products are regulated by federal securities laws and the SEC and must be sold with a prospectus.
VUL insurance is more expensive than other forms of permanent life insurance but can bring worthwhile rewards. In order to take out a VUL policy, you must have some understanding of securities, stocks and bonds, and how the investment market works. Ultimately the success of the policy depends on the investments the holder makes.
As with all life insurance, you should consult with a reputable agent before making any decisions on which policy or policies to take out. It is a complex area as the circumstances and needs of people vary, as do the costs and benefits associated with particular policies. The price of an identical package can change significantly from one insurance provider to the next.
Life Insurance Covers with no Exam
A report released earlier detailed how many American consumers do not get quotations for life insurance because they are afraid that they will probably fail the medical exam which is usually required by insurance providers before a policy will be issued.
However, these individuals were unaware that there are actually several types of insurance policies that do not require a medical examination.
- Simplified Life Insurance – This involves the policyholder providing their medical history via the application form and not having to submit it to a medical examination.
- Graded Benefit Life – In this policy, no questions are asked regarding the health of the applicant and no medical examination is required. However, these policies are generally difficult to purchase and are designed only for those of late middle age or older.
- Guaranteed Issue Life – No health history or medical examination is required for this type of policy and no applicant can be turned down. It is because of this that this insurance can also be known as Guaranteed Acceptance.
When a typical insurance policy is purchased, the application process can take anything up to six weeks before a policy will be issued to the applicant. However, for no exam policies, the process is much shorter and can often be completed on the same day. This is one of the reasons why these policies are now becoming much more popular.
In addition to the time factor, they also allow greater opportunity for those individuals who have health problems and those who are a little older to purchase life insurance.
Life insurance policy premiums are generally calculated based on the life expectancy of the applicant. Lower rates are applied to young people in good health. A medical examination is used to help insurance providers determine the general life expectancy of the applicant.
However, with no exam policies, the insurance provider has a much great level of risk when they issue an insurance policy and so they will sell policies at much higher premiums. That is why if you are in good health it is well worth the extra hassle of a medical examination to ensure a cheaper price for your life insurance.
No exam life insurance is seen as a quick and convenient method of obtaining life insurance, but consumers should not expect it to be the cheapest. However, if you are in ill health then it may be a case of expensive cover being better than no cover. In this case, no exam cover could offer the perfect solution.
