Types Of Life Insurance

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    Types Of Life Insurance: What Policy Is Best?

    Selecting a life insurance policy forces people to think about what they typically wouldn't – what might happen to family members they leave behind when they die. With that said, even if it’s uncomfortable to think about, it's important to prepare yourself and your loved ones for the inevitable. 

    But, with so many available options, it can be challenging to determine which type of life insurance best suits your interest. In this guide, we'll take you through the different types of life insurance policies and what to consider when selecting the right one.

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    What To Consider When Choosing A Type Of Life Insurance

    Most people take out life insurance to secure a specific amount of wealth for their family when they pass away. However, your life insurance policy can serve more than one purpose. When selecting a premium, consider the following factors.

    Your Current Age

    Most people will take out life insurance between the ages of 35 to 45 – yet, policy terms are often more attractive for younger applicants. The younger you are, the more options you'll have to choose from, and the lower your premiums will be. If you're nearing the age of 60, the less you become eligible for specific products such as basic term life insurance.

    How Much You Can Afford

    Some insurance policies, such as those that remain active for a limited period, are more affordable than permanent life insurance. If you're working within a budget, you might want to consider policies similar to simplified-issue term life insurance, also referred to as starter life insurance. These policies are flexible – you can even apply for them easily online.

    The State Of Your Health

    Most financially uneducated people believe that the best time to apply for a life insurance policy is when they're nearing the end of their "good years." However, most insurers prefer to work with insurers who are in good health and lack any underlying conditions. This is because of their unlikeliness to die and require a payout soon.

    When applying for life insurance, you'll have to undergo a physical exam and provide your medical history. Among the factors that can dictate your life insurance terms is whether or not you smoke – heavy smokers will have to endure higher costs.

    How Long You'll Need Insurance For

    Some insurers prefer to take out life insurance only for a specific period. For instance, a homeowner repaying a mortgage for 30 years who wants to ensure that the balance is resolved in the event of their passing may apply for a life insurance term that spans 30 years. On the other end of the spectrum, those who want to secure protection in the long-haul might prefer a permanent life insurance policy.

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    Types Of Life Insurance

    The two principal categories of life insurance are term life insurance and whole life insurance. The duration of the policy characterizes both – the former expires when the policy ends, whereas the latter is non-expiring. There are other types of policies that provide useful features outlined below.

    Term Life Insurance

    Term life insurance is a policy that provides coverage for a specified duration. If the insured passes away or incurs a permanent disability while the term is active, providers pay out a death benefit to dependents. Term life insurance is the most straightforward and most affordable life insurance policy, popular among families and employees.

    Key Features

    • Accidental death and permanent disability: If you become diagnosed with an illness covered by a term life rider, you receive a lump sum to help shoulder any financial setbacks. These riders also include circumstances such as accidental deaths and disabilities.
    • Convertible terms: Should an insurer wish to convert their policy as it nears expiration, they can transition their term life insurance into permanent life insurance or whole life insurance.
    • Increasing terms: As the policy ages, insurers can choose to increase their death benefit. However, expect premiums to rise as well.
    • No investment risk: Because insurers cannot funnel money from other accounts into the policy or pay extra premiums for additional benefits, there is no cash value. There is also no investment risk.

    Why You Should Consider It

    Term life insurance policies are incredibly accessible and easy to qualify for. A typical term life policy won't cost you more than $30 to $40 a month for up to 30 years. With term insurance, you can avail tax benefits on multiple premiums and select numerous payout options. Should you choose to convert your term insurance as it nears expiry, you won't have to undergo a medical exam nor submit your medical history.

    What You Should Look Out For

    To ensure protection for your loved ones, you must select your terms carefully. If you outlive your term and still require coverage, prices can rise astronomically after the guaranteed period. Not to mention, term life insurance policies tend to favor younger insurers – the older you get, the lower your chances of qualifying for this policy.

    Whole Life Insurance

    Whole life policies are a type of permanent life insurance that covers an insurer for the duration of their life, given that they pay their premiums on time. They are the most sought-after permanent life insurance policies that offer a cash value savings component.

    Key Features

    • Interest-sensitive terms: Should you prefer more control over your life insurance policy, an interest-sensitive whole life insurance policy provides variable rates on your cash value. As such, you can increase your death benefit without raising premiums.
    • Single-premium option: If you have a large sum of cash-on-hand, you can purchase the whole life policy up-front, accruing cash value as the policy ages.
    • Fixed premiums: As you get older, you won't have to worry about your whole life premiums rising along with skyrocketing market conditions.

    Why You Should Consider It

    What’s attractive about a whole life insurance policy is its ability to amass a cash value. Over time, you can choose to withdraw these funds or borrow against them. Unless you decide otherwise, your premiums will remain constant. Not to mention, you can funnel tax savings towards your estate and reap other tax-saving opportunities.

    What You Should Look Out For

    As compared to its limited counterpart, whole life insurance is costly. Because a portion of your premiums goes to cash value and investments, you could be paying more than you're ready to dispense. Fees on whole life premiums can be too high, yet leave you little control over investment choices.

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    Universal Life Insurance

    Like whole term life insurance, universal life insurance policies offer lifelong coverage. What differentiates universal life insurance from the former is its ability to provide insurers with greater flexibility to reduce or increase their death benefit through paid premiums.

    Key Features

    • Flexible cash value component: Like whole life policies, universal policies put a portion of premium costs towards cash value. Unlike other permanent policies, insurers may choose to surrender their policy and still receive the accumulated cash.
    • Your choice of premiums: Instead of paying a premium based on fixed terms, insurers can dictate how much they disburse or use their cash value to pay in portion.

    Why You Should Consider It

    A universal policy is popular for its ability to adjust according to an insurer's financial needs. If you're working around a tighter budget, you can pay premiums less frequently or even skip them entirely. If necessary, you can also tap into your cash value to cover the costs.

    You can also access the cash value in your life insurance policy in the form of a loan. Unlike traditional banking loans, an insurance company won't score you based on creditworthiness – you won't even have to repay the loan.

    What You Should Look Out For

    Because universal life insurance is a sought-after method for building cash value, premium payments can become exorbitant. Not to mention, these premiums will change over time, usually climbing the older you become. Though cash value grows on interest, hardly are rates fixed or certain. If you choose to pay higher premiums to satisfy increasing interest rates, missing even a single payment can put your policy at risk of termination.

    Variable Life Insurance

    Also a type of permanent life insurance, variable universal life insurance pays a tax-free lump sum to your beneficiaries in the event of your death. Like a standard universal life insurance policy, a variable universal life equivalent offers a cash value component, albeit with more investment options.

    Key Features

    • Cash value investment options: In contrast to other life insurance policies that offer a cash value component, variable universal life insurance provides a wide set of securities for investment. These include an index, portfolio of equities, bonds, or a money market fund.
    • Other death benefit structures: Typically, the death benefit attached to most types of life insurance policies will equal its face value. With variable universal life insurance, you can choose to include your cash value as part of your death benefit.

    Why You Should Consider It

    Variable policies are ideal for high-net-worth individuals with an inheritance. For beneficiaries, this inheritance is tax-free. A variable policy will also protect dependents from debts such as loans and mortgages in the event of the insurer's untimely death. Because of its cash value constituent, insurers can take advantage of investments and establish lifelong savings.

    What You Should Look Out For

    Over term or whole life policies, variable schemes are high-cost. Should you become unable to keep up with expensive premiums, you could risk losing your coverage. Additionally, variable policies require more attention than others in that you'll need to keep an eye on how your investments are doing. While cash value growth with a variable policy is often better than average, making poor investment choices can prove otherwise.

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    Group Life Insurance

    Group life insurance is available to workers and provided by company employers as part of a complete employee benefits package. This type of policy is relatively inexpensive – in some cases free – with a low coverage amount. A company will conventionally require that an employer participates in the organization for a specific period before gaining access to coverage.

    Key Features

    • Renewable terms: Provided through your employer, group life insurance equals one to two times your salary. Unlike with individual life insurance, the employing company settles all the premiums.
    • Convertible: Group life insurance policies only remain active for as long as you remain employed with your company. Should you choose to terminate your contract, you can convert the group insurance into individual insurance. However, conversion premiums tend to be high.

    Why You Should Consider It

    Because your company is responsible for going through the underwriting process of group life insurance, obtaining it is easy and poses very few hurdles – if any at all. Though it may not offer the same premium coverage or investment that universal life insurance would, free life insurance is better than none. Additionally, instead of paying the full cost of the policy, your employer subsidizes it for you.

    What You Should Look Out For

    If you rely too long on group policies before seeking other types of life insurance, you may not get your hands on enough coverage or a sufficient death benefit. The ability to customize this type of policy is highly limited and you can't transfer it to an individual policy with another insurance company.

    AD&D Insurance

    As the third leading cause of death in America, accidents can leave surviving family members financially traumatized if without any coverage. An insurance company will offer accidental death and dismemberment (AD&D) insurance as a rider to an umbrella insurance policy. Beneficiaries of the deceased or permanently disabled receive a lump-sum payment to cover medical or funeral expenses.

    Key Features

    • Injuries from accidents: As its title suggests, an AD&D policy won't cover natural deaths and illnesses. That means no coverage for heart attacks or strokes.
    • Potentially larger base coverage: If the insurer's death occurs on public transportation, the insurance company may pay double or triple the amount of the base coverage.

    Why You Should Consider It

    To get AD&D coverage from an insurance company, you don't have to take a medical exam. Even with a pre-existing condition, you won't have to provide your medical history. Unlike whole life or term insurance, you'll only have to meet age requirements.

    What You Should Look Out For

    An AD&D policy won't cost anywhere near a whole life or term policy – but that means the odds of a payout are relatively low. In addition, AD&D types of insurance are limited and can become void if you've taken it out on a group loan at your job.

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    What Life Insurance Is The Best?

    The types of life insurance you select will depend on your specific needs and financial circumstances. If you prefer insurance life-long, permanent life insurance can release a death benefit to your family whether you die the following day or in the next dozen years. If you only need coverage for a given period, a term policy may suit your needs better.

    Some types of life insurance, such as whole life coverage, will provide more than a death benefit, allowing insurers to build savings through investment.

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    In Conclusion

    What shopping for the right types of life insurance policies comes down to is understanding your financial health and what situations you're protecting yourself – and your family – from. If you're caught between deciding how much you can afford and for how long, reach out to one of our specialists at Wesley LLC and get the advice you need!

    Written By Cameron McDowell
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