Last posted by Valerie Michel Buck | longtermcarelink.net
Understanding the various types of Life Insurance policies can be a daunting but a little bit of education can go a long way. Life Insurance can be a great way to make sure your expenses and family are covered if you pass away.
Two Different Types of Insurance
Term Life Insurance
Term Life Insurance provides protection for a specified period of time at an affordable cost. Most term life insurance requires no medical exam. Term Life Insurance does not build cash value and coverage ends when policy expires and premiums may increase with age.
Whole Life Insurance
Whole Life Insurance provides protection for your entire lifetime and accumulates a cash value that the policy owner can borrow against. Whole Life Insurance premiums do not increase with age but may will likely have higher premiums than Term Life Insurance coverage.
Different types of Whole Life Insurance
Joint and Survivor
Joint life and survivor coverage is for more than one person, typically couples. Benefits are not paid until both of the policyholders have died. Lower premiums exist on the policies because of the potential for a much longer period of time before the policy is called upon to pay benefits. Joint life and survivorship insurance is a tool often used to help pay estate taxes due to the fact that estate taxes can be delayed until both husband and wife die. This can take two different forms: first to die or second to die with benefits taking place at first or second deaths.
Family income policies are a combination of decreasing term and a form of whole life where the term insurance provides monthly payment from the insured death to some point in the future.
Modified Whole Life
During the first five years, the premium is slightly more than a term life premium, and then the premium increases to slightly above what a whole life premium would have been at original purchase.
Graded premium Whole Life
Policy that starts with a low initial premium and gradually increases annually or until it levels out.
A participating whole life policy whose dividends are expected to cover all future premium payments.
Single Premium Life
Paid for by insured/owner in one single premium payment to pay a future benefit in the case of death. May have unfavorable tax consequences. This may result in the policy being classified as a MEC (modified endowment contract) thus subjecting it to taxable income and possible early withdrawal penalties.
Universal life is a type of whole life insurance. It differs because you can change the amount of your premiums that fund the policy’s cash value and thus raise or lower your premiums within limits. Universal life insurance offers two options: the death benefit can remain the same unless you change it, or it can equal a fixed amount plus the policy’s cash value at the time of your death.
Under a variable whole life insurance policy, you can target your policy’s cash value to particular investments. You may dedicate some of the cash value portion of your premiums to a mutual fund, for example, and dedicate some to purchasing bonds. Your policy may allow you to change your investments several times a year. If you fail to invest wisely, your policy’s cash value could fall to zero. However, the minimum death benefit stated in your policy will remain the same.
Why Term Life
Term Life Insurance is great for those who don’t have cash flow but would still like the benefits of having life insurance. This is great for younger people who are either single or building their family. Most Term Life Insurance can be automatically converted to whole life without an exam but most of those with Term Life don’t take advantage to this benefit.
Why Whole Life
Whole Life Insurance has death benefits as well as living benefits including a tax-sheltered cash account that builds up. Taxes aren’t incurred on the gain and that money can be used in retirement to supplement retirement planning. Additional benefits such as riders can be added to Whole life Insurance or accelerated benefits to access as much as two-thirds of the benefits while still alive. These benefits are not available with Term Life Insurance.
If you find yourself in a pinch for funds and you have a whole life insurance policy (or a term policy that can be converted to whole) and do not have a catastrophic or life-threating illness or condition, you can sell your policy to a third party for more than its cash surrender value. This is called a Life Settlement. A life settlement company, for example, would purchase your policy and become the new owner and beneficiary. They would also assume responsibility for the payment of all future premiums.