Insurance can take many forms, but one of the most important and often most overlooked is life insurance.
If you have a family or anyone that relies on you to support them, you need life insurance. Even if you don’t have a family, getting coverage now when it’s less expensive is a better alternative than waiting until you have a family, needing coverage, and paying more for it.
There are several different types of life insurance, however, and you need to know what they are before you can select the one that meets your needs.
What are the different kinds?
- Term Life
- Level term
- Decreasing Term
- Whole Life
- Universal Life
- Guaranteed Universal
- Indexed Universal
- Variable Universal
- Simple Issue
- Guaranteed Issue
What are the characteristics?
- Term – This is the cheapest form of life insurance you can buy. There are no bells and whistles to this type of policy. You are paying for the death benefit, and that’s it. It can expire with term lengths ranging from 5 to 30 years.
- Renewable term – Smaller term lengths, but the policy automatically renews at the end of each term. There is a step up in premium at each renewal, though.
- Level term – Most common form of term insurance. Death benefit and premium payments stay the same over the life of the policy.
- Decreasing term – Death benefit and premium payment decrease over the life of the policy. People buy this because as they accrue more assets, the less they think they’ll need for a death benefit to support their family.
- Whole life – Is one of the more expensive forms of life insurance. You are insured for your entire life, and there are no expiration dates. Additionally, the policy will build up cash value through an investment component. The average rate of return is around 2%-3%.
- Guaranteed Universal – Cheaper than most other types of life insurance, except for term. Generates little cash value, less than whole life. Late payments can forfeit the policy, wasting every past premium payment. The death benefit will not change.
- Indexed universal life – Cash value component is marked to an index, like the S&P 500. Upon inception, you decide on the participation rate. If you select 80%, you will participate in 80% of the index. For example, if the market goes up 10%, you only go up 8%. However, if the market goes down 10%, you don’t go backward. Your return for that period is 0%. Additionally, there can be a cap placed on the amount of gains that you make. Premium payments and death benefit can be flexible.
- Variable Universal – Cash value is tied to an investment account. Requires hands-on management. Can take partial distributions or loans from the cash value. Unlike the indexed universal, the cash value in a variable policy can go backward if the investment account declines.
- Simple issue – All of the above policies require a medical examination. This is part of the underwriting process and helps the insurance company calculate your insurability. A simple issue policy does not require an examination. You take a questionnaire and that is it. However, you can be turned down depending on your answers. If you lie, you can be charged with fraud if caught. Don’t lie.
- Guaranteed issue – This is the most expensive form of insurance you can get. Reason being is there is no underwriting of any kind. You get the policy you apply for. The coverage amounts/death benefits available are low compared to other coverages, however.
- There are a number of smaller or niche types of insurance, a good example of these are marriage insurance, burial insurance, or final expenses insurance.
Which one should you buy?
Good question. I guess it all depends on what you are willing to pay and the features you want in an insurance policy.
In my opinion, life insurance should be viewed as any other type of insurance policy. You are paying for protection and that should be it.
If you want money to accrue in a cash value account, determine what it would cost for a whole life policy, compare that to the cost of a term life, and invest the difference between the two.
However, there are certain life insurance companies, usually the bigger, better-known ones, that have made dividend payments to whole life insurance customers.
Over the life of the policy, that dividend can grow large enough to where it actually pays your premium for you. But this isn’t the case with all customers and dividends are not guaranteed.
There are generally two things to consider when picking out a policy.
One, what are you looking for? Do you just want straight life insurance? Or are you looking for a few more features, like cash value or a chance for growth?
Two, what can you afford? Regardless, you should have some form of insurance coverage, especially if you have a family.
Life insurance is incredibly important. I stress this point even more if you have a family with people who count on you for support.
Consider each of the points illustrated above and choose the best form of insurance for your personal situation.
Life insurance product features and availability vary by state. Restrictions and limitations may apply. For federal income tax purposes, life insurance death benefits generally pay income tax-free to beneficiaries pursuant to IRC Sec. 101(a)(1). In certain situations, however, life insurance death benefits may be partially or wholly taxable. Please consult a financial professional for additional information. All guarantees are based on the claims-paying ability of the insuring company.
To learn more about life insurance and to view our disclosures, visit our site > www.crgfinancialservices.com.
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