Types of life insurance: permanent, term and more
Life insurance is a contract between you and the life insurance company. You pay premiums (monthly or annual) for a payment your loved ones will receive, called a death benefit. In the event of death, the insurance company pays the death benefit to the beneficiary of your choice.
“If you don’t come home and someone is dependent on your income to live, you need life insurance,” Mark Williams, CEO of Brokers International, told Insider.
The best life insurance for you depends on your budget as well as your financial goals. There are two main types of life insurance policies: permanent life insurance and term life insurance.
Term life insurance vs permanent life insurance
The difference between
and permanent life insurance is similar to the difference between renting an apartment (term life) and owning a house (permanent life).
When you rent, you have a lease for a certain period. When that lease is over, you can renew it, but most likely with an increase in rent. Likewise, term insurance lasts for a set period of time, and when it is over, you can reapply for coverage, but premiums will most likely increase as you get older and your health deteriorates.
Permanent life insurance has a death benefit for your beneficiaries and a cash value that you can use while you’re alive. It’s like owning a home, where you earn equity that can be used as collateral – and your home can be passed on to your heirs, leaving an inheritance.
Whether you choose permanent or term life insurance, you will need to go through the underwriting process. The underwriting process is how the insurance company determines your insurability – that is, how much risk you are and how much to lend you.
It collects information about your health (medical history), job, income, finances, and other personal information to determine how much they will insure you and what your premium will be. This may require a medical examination, which includes taking a sample of blood and urine.
Types of permanent life insurance policies
There are different types of permanent life insurance. They all have death benefits and a cash value that increases with tax deferred.
The biggest difference between types of permanent life insurance policies is how the cash value component of the plan is invested.
- All the life: Guarantees exactly the same payment for the entire term of the policy. The insurance company invests your premium with its own portfolio. The appeal is that your payment remains the same throughout the life of the policy. Many life insurance companies also offer to increase the death benefit over time.
- Universal life: Created in the 1980s when interest rates were high, universal life insurance policies give you flexibility. You can increase or decrease your death benefit, and you can change your premium payments if your circumstances change.
- Variable life: This type of permanent life insurance policy was created years after universal life for people who didn’t like the way whole life and universal life combined their investments with the insurance company. Variable life is for those who want to control how their cash value earns interest. Your money is invested in the stock market rather than with the insurance company. If the market is doing well, so are you, but if the market falls, so will your cash value, which makes it riskier than whole life and universal.
- Variable universal life: Variable universal life insurance is a combination of universal life insurance and variable life insurance. You can increase or decrease your death benefit and invest your cash value on the stock market. Again, it’s risky, but if the market goes up, so does your cash value.
Types of term life insurance policies
There are several types of term life insurance policies. Some are more popular and more expensive than others. Below is a list of the best term life insurance policies.
- Level bonus: An equal term policy pays the same amount of benefit if death occurs at any time during the term (five, 10, 20 or 30 years). It is the most popular type of term life insurance.
- Annual annual renewable: If a policy is “renewable”, it means that it remains in force for one or more additional terms, up to a specified age, even if your medical condition (or other factors) would cause you to be rejected if you requested a policy. new life insurance policy.
- Reimbursement of the premium: For most types of term insurance, if you haven’t had a claim under the policy by the time it expires, you won’t get any refund. But some insurers have created term life insurance with a “return of premium” feature, which returns some or all of the money you’ve already paid if you haven’t used the policy after your term ends. . You will pay extra for this feature.
- Guaranteed issue: These policies are easier to obtain because they do not require a medical examination. You must be 50 years of age and over. Additionally, the policy might not pay a full death benefit during the first few years of coverage, according to Guardian Life.
- Simplified problem: No medical exam is required with a streamlined issuance policy, but you must still complete a health questionnaire and provide access to medical records. There is no age limit. If you fail to disclose a condition and you die, the insurance company may deny death benefits to your beneficiaries. Some insurance companies may not pay a full death benefit for the first few years of coverage.
- Convertible: This allows you to convert a term life insurance policy to permanent life insurance without additional evidence of insurability.
- Group life insurance: This is life insurance provided by the employer and generally offered free of charge. However, if you are fired, retire or resign, you will lose your coverage.
- Final expenditure: This is a type of guaranteed issue policy that can be term or lifetime, with a low death benefit that covers funeral and burial costs.
What type of life insurance should you purchase?
Your life insurance needs change with age, and you’ll need to consider children, marriage, divorce, retirement, and caring for aging parents. Consider consulting with a financial advisor, an estate attorney, and an accountant to make sure you have the right coverage for your goals and life changes. The best life insurance for you depends on your budget and your financial situation.
If you are on a fixed income with limited means, the end expense might be the best for you. If you have any health issues that could prevent you from purchasing traditional coverage, you may want to consider life insurance without a medical exam. If you want coverage for your dependents in the event of premature death, then a term life insurance policy will work. If you are looking to build an estate and leave a legacy, a permanent life insurance policy is the best solution.
Talk to your insurance agent or financial planner about what is best for you and your budget based on your financial situation.