What are the principal types of life insurance? | III
Life insurance can be an essential part of financial and legacy planning. When looking for coverage, you can find several products that fall into two main categories: term life insurance and permanent life insurance (also commonly known as whole life insurance). Understanding the essential differences between these two main types of insurance can help you make coverage decisions based on your needs and goals.
Remember that group insurance products, policies that cover a group of people under a single contract (for example, coverage offered through an employer), may differ from policies sold to individuals. the following information below focuses on products typically sold to individuals.
what is term life insurance?
A term life policy is purchased to last for a specific period, such as 1, 5, 10, or sometimes up to 30 years. coverage expires when that period ends, hence the name, and therefore payment only occurs if the insured’s death occurs during the specified period. if the insured person outlives the original policy period, renewal of coverage may be an option, but premiums may be higher.
how term life coverage works
A term life policy may be the simplest and most straightforward life insurance option for many people. A death benefit can replace income you would have earned for a set period, such as until a minor dependent grows up. or you can pay off a large debt, like a mortgage, so that the surviving spouse or other heirs don’t have to worry about making the payments.
When exploring life insurance options, you may come across the word “cash value.” term life policies do not accumulate cash value. their premiums go towards their payment, making costs to policyholders comparatively lower than permanent life insurance. however, some insurers have created term life products with a “return of premium” feature, returning a portion of the premiums you pay if a claim is not filed before the end of the coverage period. These policies can be more expensive up front than standard term life insurance.
There are different types of term life insurance, including level term and declining term.
- Leveled term life insurance offers a death benefit that remains the same throughout the policy.
- Decreasing term life insurance reduces potential death benefits over the term of the policy, usually in one-year increments.
For more details on the different types of term life insurance, click here.
what is whole or permanent life insurance?
Permanent life insurance, often called whole life or cash value life insurance, provides coverage for the life of the insured person, as long as premium payments are up to date. Unlike term life insurance, these policies can accumulate cash value, which an insured or her heirs can access under certain conditions. premiums, as a result, can be higher than term life policies. Whole life products include several subcategories, including traditional real life, universal life, variable life, and variable universal life.
how does “cash value” work?
When you pay premiums for permanent life insurance, they go toward the cost of your insurance, your policy fees, and cash value building. In the case of traditional whole life insurance, both the death benefit and the premium are typically designed to stay at the same (tier) for the entire policy period. however, the costs to insure can go up a lot as you get older, especially when you live past 80 years.
Charging a premium that increases each year would make life insurance unaffordable for many seniors. Instead, the insurance company charges a higher premium throughout the coverage period than is necessary to pay claims in the early years of the policy. the company invests this money and, as needed, uses it to supplement the level premium to help defer the cost of insuring older policyholders.
By law, when these “overpayments” reach a certain amount, they must be made available to the policyholder as cash value, accumulating in a savings account. Under certain conditions, the policyholder may withdraw or borrow against the accumulated cash value. It is important to remember that the cash value is generally restricted as a living benefit and remains with the insurance company when the insured dies. any loan against the cash value may reduce the death benefit.
term life or permanent life: which one suits me?
All permanent or whole life policies typically offer the benefit of coverage throughout your life, but may charge higher premiums than term life products. therefore, your death benefit may be less than with term life insurance for the same amount of money. People who choose whole life insurance are likely to prioritize certain features that fit their individual financial goals, such as the ability to plan consistent benefits and premiums and the potential for tax-deferred savings growth through the component. of your policy’s cash value.
click here for more details on permanent or whole life insurance.