During the pandemic, many individuals have come to the realization that they need life insurance protection. One of the next questions they then seek to answer is, What type of coverage should they buy? I believe you should always seek out an internet or local licensed life insurance professional to help you evaluate the coverage needed and the best type of policy for your needs.
What follows is an excerpt from my book Today’s Life Insurance – A Protection Tool for Your Future that discusses this subject.
The Different Types of Life Insurance
Once you determine the amount of coverage you need, there are a number of different types of life insurance coverage you can purchase to meet your needs. The most common product types are discussed below.
Term Life Insurance
Term life insurance is designed to provide purely financial protection for a specific period, typically ranging from five to thirty years. With traditional term insurance, the premium payment and the coverage amounts stay the same for the coverage period you select. There are, however, some policies that change the coverage amount but keep the premium the same. I would avoid these policies and stick to those where the annual premium and coverage amount are guaranteed for the term period selected.
After the initial term period, policies may offer continued coverage without you needing to undergo new underwriting, but these policies will usually involve substantially higher premiums because of your increased age or changed health. Term life insurance is generally less expensive than permanent life insurance.
Term insurance does not, except in very rare cases, accumulate cash. It is designed to pay a lump sum amount of cash or a number of benefit payments in the future if the insured dies or certain events take place. It provides cash for future delivery. It needs to be used in such a way—protection for a defined period of time with no cash accumulation.
Whole Life Insurance
Whole life insurance is one type of what is called permanent life insurance. It is designed to provide lifetime coverage. Universal life is another type of permanent coverage, which we will discuss later.
The key attribute of whole life is that it has fixed-level premiums (e.g., $200 per month) that keep a fixed coverage amount (e.g., $150,000) in force for the life of the policy. The premiums and coverage amount do not change. They are fixed. You do not have the flexibility to reduce the coverage amount or related premiums. Because of the lifetime coverage period, whole life insurance has higher premium payments than term and universal life insurance. Whole life insurance builds cash value, which functions as a savings component and accumulates tax deferred over time.
There are three major ways the cash value earns interest: Fixed, variable and indexed. Also, you may purchase what is called a participating policy under which you share in the profits earned by the insurer.
In recent years, life insurance companies have added innovative new benefits to these policies that allow the cash accumulated in the policy to be used to pay for critical illness or long-term care expenses.
Final Expense or Burial Whole Life Insurance
Final expense whole life insurance is a form of whole life insurance that is designed for older individuals (ages fifty and older) to be used to pay primarily for burial and what are referred to as final expenses. The policies are designed to pay a limited death benefit amount—usually from $5,000 to $50,000. The policies are designed and underwritten (usually on a guaranteed issue or simplified basis) considering these smaller amounts.
Final expense life insurance refers to insurance used for covering the policyholder’s final costs such as burial or cremation, a funeral or remaining unpaid medical bills. While these things may seem fairly simple, they can be surprisingly expensive. Caskets alone cost hundreds to thousands of dollars, and with other traditional expenses added on, the average price of a funeral today ranges from $7,000 to $9,000 not including the costs of a burial plot and related expenses.
Universal Life Insurance
Universal life insurance is a type of permanent life insurance designed to provide lifetime coverage and accumulate cash value. It is called universal as the owner can design the policy to provide maximum protection or to generate cash accumulation. The owner also is granted the flexibility to change the premiums paid into the policy as coverage amounts are changed.
As stated above, unlike whole life insurance, universal life insurance policies are flexible and allow you to raise or lower your premium payment or coverage amounts throughout your lifetime. Additionally, due to its lifetime coverage, universal life typically has higher premium payments than term but less than whole life.
How does universal life insurance work? Universal life insurance has a cash value component that is separate from the death benefit. Each time you make a premium payment, a portion is put toward the cost of insurance, and the rest becomes part of the cash value. The rate of interest changes, usually annually, as can the other costs of the policy.
Summary
There are several different types of life insurance policies. They have been designed to meet the differing needs that consumers have for protection, accumulation and their objectives in buying the coverage. In the last decade insurance companies have also added new benefits to the policies that can cover critical illness, long-term care events and provide supplemental sources of retirement income. These products are a tool that can help protect your financial future and are worth investigating.
To discover the answers to key questions of buying life insurance and to get more information on the benefits of coverage, check out The FinancialVerse: Today’s Life Insurance — A Protection Tool for Your Future.
This book will help you prepare to meet with a financial professional and apply for the life insurance coverage that you need.