“What’s the purpose of a life insurance policy if you are not around to enjoy its benefits?” Many people ask this question but the answer is simple: a life insurance policy isn’t for you; it is for the loved ones you leave behind.
Life insurance offers a safety net for your family in the event of your death, which means it is one of the most selfless gestures a person can make. The policy offers financial aid to help your family cover bills like childcare, mortgage, medical bills and other day-to-day expenses. In exchange, you pay premiums to the insurance provider.
However, when it comes to picking the right type of policy, things can become complicated. Below are some of the life insurance policies that exist in the market. Check them out and see which plan is the best fit for your family.
- 1. Term Life Insurance
- 2. Permanent Life Insurance
- 3. Whole Life Insurance
- 4. Universal Life Insurance
- 5. Variable Life Insurance
- 6. Variable Universal life Insurance
- 7. No Medical Exam Insurance/ Simplified Issue Life Insurance
- 8. Guaranteed Issue Life Insurance
- 9. Accidental Death and Dismemberment Insurance
- 10. Final Expense Insurance
- What Kind of Life Insurance Is Best For You?
1. Term Life Insurance
Term life insurance is the most common and the most affordable type of life insurance in the market. This is because this policy offers only “pure death benefits,” without accruing any cash value. The policy can be paid out in monthly or annual payments, though mostly people prefer it be paid out in a lump sum by the insurance company.
Term life insurance is also comparatively economical and comes in 10, 15, 20 and 30 years terms, typically. If you buy a 20-year term life policy for $500,000, you will pay monthly premiums for 20 years. If you die during these years, the insurance company will pay $500,000 or a death benefit to the beneficiaries.
2. Permanent Life Insurance
This type of life insurance lasts your entire life. Unlike term, these policies don’t expire but continue on until you die or stop paying the premium.
They also include a cash value component, in addition to the death benefit. When you pay a premium, most of the money goes into sustaining the life insurance policy for you while the rest is poured into a cash value component. The cash value builds up every year and the longer you have the policy, the more valuable it becomes.
A policy holder can access their cash value pool to get funds in an emergency. However, this will reduce the cash value and death benefits as well as increase the likelihood that the policy will lapse. It can also result in a tax liability if the policy terminates before the death of the holder.
A permanent life insurance policy can cost as much as 20 times more than a life term policy so it is not feasible for younger or low-income families. The details of how much benefit the family will receive and how much the cash value will grow depends on the kind of policy you buy and the amount of premium.
3. Whole Life Insurance
Whole life insurance is a type of permanent life insurance and is more complicated and definitely more expensive than term life insurance. With this type of policy, the premium amount is locked and will remain the same throughout the lifetime of the policy. This means if an individual in his or her 20s and 30s purchased a whole life policy, they will pay the same premium year after year, even if they get old and contract health issues.
Additionally, the policy also has a cash value component, where the portion of the amount goes into cash value and grows over the whole life of the coverage. This type of policy is expensive because you also need to factor in taxes, agent’s commission and interest as well as other conditions. It also means that your policy may cost as much as 6 to 10 times as a life term policy. What’s worse, you will only get minimal return from the cash values. However, this type of policy is good for wealthy people who have large premiums and welcome the extra amount generated from the cash value to pay for estate plans and endowments.
4. Universal Life Insurance
Another type of permanent coverage is the universal life insurance. However, unlike whole life policy, this coverage provides flexible premium amounts. This means the insured will have some say, within guidelines, to choose how much of the amount will go towards sustaining the death benefit and how much will go towards the cash value feature.
Similar to the whole life policy, the cash can be withdrawn for any reason. In fact, if you have enough money in your cash value component, you can skip your premium payment by using the cash value to pay your monthly amount. Keep in mind, however, that the interest rate of the cash value is sensitive to the current market rates. If the interest rate in the market falls, your cash value will yield less, and you will have to pay an increased premium to balance your reduced cash value.
The adjustable premium amount is what attracts people to this type of policy. However, the same thing also makes it even more confusing and the changing death benefit and cash value amounts come at an added cost.
5. Variable Life Insurance
Another form of permanent life insurance, variable life insurance is both a life insurance option and a limited investment option. The policy comes with a death benefit and cash value feature, although the insured can also take part in different investment options, such as equities. This means your funds have a chance at a higher tax-deferred growth, but you can only invest in mutual funds-like sub accounts offered by the insurance company. With this policy, the death benefit may go up and down but there is a guarantee it won’t go below a set amount.
Additionally, it also means greater risk and potential for losses as the funds are exposed to the fluctuations in the equity market.
6. Variable Universal life Insurance
A hybrid of universal life insurance and variable life insurance, this type of policy is even more complicated — and also way more expensive. A variable universal life insurance takes the components of both the aforementioned policies: the insured person can have flexible premiums and death benefits as well as an opportunity to invest in the insurance company’s sub-accounts. However, it will also have no guarantees of the minimum cash value in the policy.
This is perhaps the most complicated, most expensive and riskiest type of insurance policy, depending on how you look at it. Experts advise rather than signing this policy, people should invest in a simple term life insurance and a separate, dedicated mutual fund, which can mean lesser fees and lower risks.
7. No Medical Exam Insurance/ Simplified Issue Life Insurance
When you apply for a life insurance, you typically have to have a medical screening so that the insurance company can determine how risky you are. This requires an in-depth health questionnaire as well as tests of your urine and blood samples. Your premium rate is set based on that. But as the name indicates, you don’t have to do that in the no medical exam insurance policy. You just have to pay a lot more.
No medical exam insurance is a lot more expensive than whole life insurance and also yields lower benefits. You won’t be asked for a medical exam but you still have to fill out a health questionnaire, which includes questions about your smoking habits or chronic diseases. If you are young and healthy, you will pay lower, though still expensive, rates. However, if your health is really bad, your premium will be set really high or the insurance company can refuse to provide you with insurance entirely.
8. Guaranteed Issue Life Insurance
Guaranteed issue life insurance takes the concept of no medical exam insurance a step further by allowing you to forego your health questionnaire, as well. All you need is your name, age, gender and state of residence and the insurance provider will provide you with coverage, as long as you can pay the premium. This type of policy is good for the elderly who have several health issues and can be denied other types of insurance coverage.
However, since this policy comes with even more risk than the no medical exam insurance, it is more expensive. A policy holder may have to pay $200 or more a month for just $10,000 worth of coverage. If you compare it with paying $30 for a $500,000 coverage that comes with term life insurance, this is exponentially more.
9. Accidental Death and Dismemberment Insurance
Accidental death and dismemberment insurance is one of the most popular kinds of insurance policies. Most of us have encountered insurance salesperson trying to sell us inexpensive policies that will pay out in case of an accident or in the event of your death. If a person loses an arm or leg during work or during an accident, this policy will pay out a portion of the benefit. If the insured one dies, the insurance company will pay out the full death benefit.
These policies are quite affordable; hence their yield is also low. They also will not pay you if you die because of a medical procedure, chronic health issues or drug overdose. Additionally, as you grow older, your chances of dying by accident grow significantly less. Given these conditions, it is better to invest in a term life insurance policy.
10. Final Expense Insurance
The final expense insurance is also called the “burial insurance.” It is to make sure your loved ones are not saddled with the burden of your funeral expenses. Not a pleasant prospect but a necessary one.
This insurance policy is usually geared towards people who are 50 to 85 years of age, although some companies provide insurance to even older people. The premium rate is quite low and coverage is only for small amounts from $5,000 to $25,000.
The average funeral cost in the United States is somewhere between $7,000 to $10,000; this type of money is not something many families can quickly rustle up. So, having a final expense insurance policy can definitely help you.
What Kind of Life Insurance Is Best For You?
Life insurance policies should be simple. Fortunately, the simplest one is term life insurance, which is also the best one, in most cases. If you want an inexpensive, clear-cut, tax-free policy, term life insurance is often the best bet.
To make the most of this policy, consider coverage of at least 10 times your annual, pre-tax income. That means if you make $50,000 a year, you should at least have a cover of $500,000. This way, your surviving loved one can invest the payout in a good mutual fund which yields 10-12 percent a year and can get at least $50,000 a year, even when you are not present.
However, there are multiple insurance policies for a reason. For some, the best polices can be the permanent life insurance policies, which allow them to “force-save” money for their death. This is good for those people who are not great savers and it will offer them separate cash value too.
For those people who have extensive health issues and cannot get regular permanent or term life insurance plans, no medical exam insurance or guaranteed issue life insurance are the best bets.
For people who just want to save money for their funeral, final expense insurance is an affordable and easy way to do so.
Whatever your requirements, it is a good idea that you first consult with a financial adviser or a trusted loved one about what policy suits you the best. Knowing the ups and downs of the insurance policies can make you form an informed and right decision for your loved ones.