Types of life insurance! One of the many questions people ask me is what are the different types of life insurance?
Most people are familiar with term life insurance but that is about it.
There are basically 2 life insurance types, term insurance and permanent life insurance. Under each heading there are many different policies you may want to know about.
Term life insurance is less costly than permanent life insurance. Anybody can afford to buy term coverage. Permanent insurance is a little more complex and more expensive.
The Basics Of Term Life Insurance
Term life insurance is also known as term insurance. In fact the phrase term insurance was more commonly used until the past 20 or 30 years.
Term insurance is considered temporary insurance as there is usually a limit to the number of years you can keep the policy. There are several types of term policies. They are as follows:
Yearly Renewable Term Life Insurance
This is really a one year term policy with what you may call an option to renew it each year, on the policy anniversary. The policy is usually renewed without any additional evidence of insure-ability. As you get older the amount of premium you pay increases.
These policies limit the number of years you can renew them. 5 or 10 years, for example. The cost per thousand for this type of life insurance is very low initially but because of the yearly increase can eventually become quite prohibitive. The death benefit remains level throughout.
Decreasing Term Life Insurance
One of the more popular types of life insurance is the decreasing term life insurance policy. This policy was designed with the express intent of paying off a mortgage upon the death of a home owner. The face amount is usually in the amount of the mortgage owed.
As the balance decreases so does the face amount of the policy. If, therefore, the homeowner should die in the tenth year the amount the insurance company would pay is what is owed to the bank, or mortgage company, at that time. This type of life insurance is very inexpensive and most homeowners think it is a good idea.
Level Term Life Insurance
Among the more favored types of life insurance policies are the level term policies. At the point of purchase you select the period for which you intend to keep the policy.
You may decide you want a 5 year term policy, a 10 year term policy, a 15 year term policy, a 20 year term policy, a 25 year term policy or a 30 year term policy. Some carriers also offer a term to 65 and age 80. The face amount of these policies remain level for the duration as well as the premium.
When deciding which one is more suitable for your situation you should keep this in mind. The longer you want to keep your policy the higher the premium. So, a 10 year level term policy will cost more than a 5 year term policy.
A 30 year term policy will cost more than a 15 year level term. The reason for this is that the life insurance company calculates the risk over the entire period then divides the cost evenly over the number of anticipated years you will own your policy.
The premiums for some level term policies are somewhat modified. Let us take the term to age 80. The premium may remain level up until age 60 or 65 then you pay an increased amount for the balance of the term period.
Other policies start out with a very low premium, to help you get started, then increase every 5 years for a limited period of time. The premiums remain level thereafter. In other words, there are many modifications to these types of life insurance policies depending on the company you choose to deal with.
The second type of life policies are known permanent life insurance. As the name implies you keep these types of life insurance for the rest of your life. The death benefits are usually level for your entire life and so are the premiums. Other than that there are major differences between these policies and term policies.
Whole Life Insurance
Whole life insurance accumulates what is commonly referred to as cash values. The cash value of a whole life policy includes a guaranteed amount that will be returned to you if in the future you should choose to surrender your policy. It also includes dividends, depending at your choice at the time of purchase.
If you left your dividends to accumulate interest or if you applied them to purchase paid up additions the amount received down the line can be considerable. The total may be even more than the total premiums you paid.
It is important to keep in mind that dividends are not guaranteed. They depend on the investment performance of the life insurance company as well as how efficiently the company keeps down expenses.
Universal Life Insurance
Universal life is the result of a savings plan combined with a term policy. You can keep your policy for the rest of your life. This policy also has cash values. The variable universal life policy is made up of a permanent policy and an investment portfolio selected by you.
Variable Life Insurance
This type of life insurance policy is a combination of whole life insurance and other investments. Your money is usually invested in stocks, bonds or mutual funds. You choose what you want to invest in.
The variable universal life policy and the variable life policies are sold only by prospectus which you should carefully read. Anyone selling these types of life insurance are required to have 2 licenses. They must have a life insurance license for the state in which they are domiciled as well as an N.A.S.D license.
Here is a comparison between term insurance and permanent insurance which you should find helpful.
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Many life insurance buyers find the 30 year term insurance policy quite attractive. It fulfills their needs. Who, what kind of buyer, would buy the 30 year term policy.
The 20 year term insurance policy is probably the most loved and most bought term life insurance policy. The reasons for this are pretty obvious. People tend to think 20 years when planning long term.