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Different Types of Life Insurance
What are the types of Life Insurance?
Life insurance can be divided into two main types: 1. Term and permanent life insurance 2. Cash value life insurance.
Term life insurance policies only gives you coverage for a certain period of time, such as for a period of 20 years whereas Permanent policies are sold primarily as either universal or whole life insurance; Permanent policies are designed to offer coverage for the duration of your natural life that is till your death.
What is Term Life Insurance?
Term life insurance is the most inexperienced type of life insurance coverage. Most people like it because it is not designed to last into old age. Most term life policies last between 10 and 30 years of an insurer.
The best term life insurance policies offer reasonably priced coverage. Before the term policy expires, it can be converted into permanent that's why this is called convertible term life insurance. The advantage of buying convertible term is that you can lock in the health classification which the insurance company gave you at the time you first applied for the term policy. The importance of it is that if you develop a health issue that could increase you rate, or if make you become ineligible for coverage.
Most term life insurance policies also have the option to renew coverage on an annual basis when the term expires. But the premium will continue increasing annually based on your current age; if you like to have coverage longer than the duration of your term policy, it is best to convert it to whole life instead of renew of the existing term policy. Most companies offer term life insurance for terms up to 30 years, in rare some, such as Protective, offer terms up to 40 years.
What is Whole Life Insurance?
Whole life insurance is more expensive than term life insurance and even universal life insurance which is an another form of permanent coverage. The reason behind it is whole life insurance has strong contract guarantees ensuring your coverage would not lapse. The insurance company guarantees the death benefit and cash values for life as long as you pay premiums as scheduled in the contract, . For this reason it is an ideal solution to your need of rock-solid permanent coverage with affordable premiums. Whole life insurance policies offers dividends like Mutual life insurance companies.
Universal life insurance is more flexible allowing you to skip premium payments as needed, but the risk remains if lapse in later years you don't build up the cash value sufficiently.
Most permanent policies have a surrender period. During surrender period you will pay a surrender charge for withdrawing from the cash value or canceling the policy.
What is Universal Life Insurance?
Universal life (UL) insurance is similar to whole life insurance though there is a couple of important distinctions. You can change the premiums and death benefit after the policy has been issued, and subsequently interest is credited to the cash value based on current interest rates. You do not know in advance how much the cash value will be worth in the future unlike whole life insurance.
Universal life insurance is more affordable than whole life insurance, though you may need to increase your premium payment in the future provided the cash value does not perform as expected or you don't make sufficient premium payments.
What is Indexed Universal Life (IUL) Insurance?
Indexed universal life insurance policies are a kind of hybrid type of Universal Life coverage that offer an opportunity to make a profit from upward swings in a variety of popular stock market indexes, Positive index performance results in the cash value which is credited, but negative performance does not result in a cash value loss. The least amount that the cash value will be credited is referred to as the floor. Most Universal Life policies have a 0% floor.
Conversely, gains are limited. insurance companies are innovative provided it comes to the complexity of calculations that they employ to limit their gains. For example, an Universal Life policy may be subject to one or more of the following:
Participation rate: This is the percentage of index gains credited to the policy. For example, if the index returns 10% and the participation rate is 60%, 6% would be credited.
Spread: Spread rate is substracted from the index’s gains. If the index returns 10% and the spread is 4%, you will be credited 6%.
Cap: This limits the amount of interest that your policy can be credited. When the cap is 6% and the index returns 10%, 6% will be credited to the cash value.
Universal Life policies can be an attractive proposition if you like to have the potential for stock market gains but at the same time want to avoid losses. You need to be aware that if the index doesn’t perform well enough, interest credited could be insufficient to go on with policy expenses and ultimately your premium could increase.
What is Variable Life Insurance?
Variable universal life insurance is the most risky type of coverage ever known. Like Indexed Universal Life, it is typically designed on the structure of a regular universal life insurance policy except that the cash value is invested directly in the stock market via subaccounts like mutual funds.
Though the cash value is not protected from market losses, variable life insurance can be a tax-advantaged way to invest in the stock market. It denotes that if your investments are underperform, you could be required to increase premium payments otherwise the policy could lapse. What's more is that Variable Life Insurance policies that lapse may result in severe tax consequences.
Most people should only invest in variable life insurance provided they have sufficient life insurance coverage in place through another policy. Like an investment product, it can only be sold by life insurance agents that are also licensed to sell securities. Always ask for a prospectus before investing in Variable Life Insurance. It's best to speak with a financial advisor in order to be sure an investment in variable life insurance makes sense.
What is Burial Insurance?
Burial insurance policies are whole life policies which are designed for older applicants in poor health not necessitating a medical exam. Some policies have a good number of health questions, while other policies are considered guaranteed issue and do not ask about your health at all while determining your rate or approving your application. Consequently these policies are the most expensive, due to the amount of coverage.
They also have a Graded Benefit for two to three years. If you die due to natural causes during this time, your beneficiaries will only be paid a return of the premiums you paid along with a percentage like 10%. Your beneficiaries will not receive the full death benefit unless you die after the graded period is over. The minimum age for burial insurance may be as low as 40 years old, though some companies have higher minimum age limits.