Understanding the Types of Life Insurance Coverage
Buying insurance policies is about protecting yourself and those you love from financial losses. Life insurance is no different. These policies can pay your beneficiaries (usually a spouse or children) when you pass. For many families, life insurance provides a little breathing room when a loved one passes away.
Life insurance can pay for funeral expenses, help keep your family in their home, and provide a small amount of relief during a stressful time. Life insurance policies, like any other insurance policy, come with different policy limits, exclusions, and premiums. It makes figuring out what to buy and how much a little more complicated. Here, we’ll walk you through what you need to know to take the next step towards finding the right life insurance policy for your needs.
What is Life Insurance?
Life insurance is a specific type of policy that pays a predetermined sum in the event of your death. It’s protection for those who depend on you the most. If you have a family or a business that you would be leaving behind, life insurance is a smart idea.
Life insurance policies provide guaranteed protection, often in the form of a lump-sum payment. The money can be used to replace the income of a deceased spouse or parent. And if you know what you’re buying, there is potential cash value growth and dividend potential in your investment.
Types of Life Insurance
All life insurance policies fall into two broad categories. The first is term life insurance which is a set-duration policy, typically for 10, 20, or 30 years. These policies pay if you pass during the term of the policy. The second category is permanent life insurance. This type of policy does not have an expiration date. Once you buy it, you’re covered.
Term Life Insurance
Term life insurance policies are the most popular because they often come with lower premiums, and most shoppers are looking for coverage during their income-producing years. Once their homes are paid off and they’ve reached retirement, their financial needs drop significantly, and may choose to discontinue or lower their policies as they transition into a more secure period in their lives.
Term life insurance comes in different varieties:
● Increasing term life insurance
● Level term life insurance
● Decreasing term life insurance
Group term life insurance is the most common type of increasing term insurance. This means that the longer you pay on the policy, the higher the benefit payment becomes. These policies can be sold with a fixed-rate premium that remains the same for the life of the policy or with an increasing rate premium that goes up in proportion to your benefit amount.
Simplified term life insurance is pretty straightforward. It’s one rate and one benefit amount for the entire duration of the term. These policies are common because they are easy to get and often require no medical exam.
Permanent Life Insurance
For those looking to invest in life insurance and want good coverage that lasts their entire lives, permanent life insurance is the better option. These policies are also called whole life insurance. While permanent life insurance options are a good investment for individuals with significant dependent needs, they come at a cost.
These policies are complex and can cost up to 15 times more than term life insurance. Plus, since they are viewed as an investment rather than a contingency with an expiration date, they earn interest, including fees to manage, and can count towards your taxable income. These differences make whole life insurance a lot more complicated, so you’re not exactly comparing apples to apples here.
Still, permanent life insurance options are a good choice for individuals with disabled dependents who will require lifelong support. And in some other situations, they make good financial sense depending on individual needs and financial situations.
Permanent life insurance options come in many different varieties, such as:
Universal life insurance
Whole life insurance
Universal life insurance policies are a lot like whole life insurance. They offer a cash value investment, so your premiums go directly towards your benefit. The big difference is that universal life insurance allows flexibility. You can change your benefit amount and premiums as your needs change.
Like many other investments, universal life insurance comes with different risk levels. Indexed universal life insurance is for serious investors looking to capitalize on stock market performance. Guaranteed universal life insurance provides a more stable alternative without the risk of riding the stock market. And variable universal life insurance uses a variable interest rate to provide a middle-of-the-road option with bigger gains than the guaranteed option but more stability than the indexed option.
The third type of permanent insurance is variable life insurance. It’s another alternative that uses the stock market to build value. These policies are the most similar to direct investments. But as with any investment, there is significant risk with this type of policy. The potential for gains is high, but the value and subsequent benefit payments vary depending on stock market performance.
Buying Life Insurance
There are two ways that people obtain life insurance coverage. The first is by purchasing a policy through an insurance agent. This provides the most options and control over benefit selections. The second is as a benefit offered through an employer. Every year when you sign up for health insurance, you may be offered a variety of benefits that include a life insurance policy.
Policies offered through an employer are called group life insurance. These are a specific type of term life insurance with a set term and benefit amount. These policies may or may not require a medical exam. These may be insufficient as many policies provide minimal coverage to keep rates low.
Before you buy, make sure you understand:
Type of insurance offered
Cost of premiums
Factors that influence costs (e.g., health conditions)
Whether costs and benefits are fixed or variable
Term length & if policy is renewable
Investment type (for permanent options)
The Bottom Line on Life Insurance
There are more end-of-life expenses than you realize. The cost of a funeral, settling an estate, and taking care of dependents adds up quickly. When it comes to covering those expenses, there are several different life insurance options. Talk with your agent today to see if you have enough coverage and explore your options for bulking up your policies.
Contact CIIG today; our trusted agents are ready and willing to work with you to find a great deal on term or permanent life insurance.