Life insurance describes a contract between the insurance company and the owner of the policy. The policy pre-determines a certain amount of money that will be given to designated beneficiaries. The money will be awarded in the event of the policy owner’s death from natural causes, untimely death, terminal illness or other illness. The insurance company will pay out the amount to the beneficiaries either in intervals or in a “lump sum.” There are several types of life insurance policies available: Term Life Policies and Permanent Life Policies. Life insurance premiums will be affected by the age of the policy holder, pre-existing health conditions and other factors. Most people are unaware that there are over 9 types of life insurance available to them, and here they are in no particular order:
Term Life Policies
Term life insurance policies are only valid for a certain period of time. The beneficiaries will receive payment if the policy owner dies within the policy period. Term life is more affordable than permanent life insurance. The premiums will vary based upon the length of the term and the amount of coverage purchased. Most individuals purchase this type of insurance. A term life policy may be extended; however, the premiums increase because the policy is older. Term policies have no cash value. Term life insurance provides protection for term lengths or five, 10, 15, 20 or 30 years. Many individuals purchase term life insurance for its affordability and for its flexibility in the short term.
Permanent Life Insurance Policies
Permanent life insurance provides protection for beneficiaries after the policy holder dies. Since protection lasts as long as the individual is making a payment, the policy holder should not be concerned about the policy expiring or ending at a specified period of time. This type of policy offers the most security for your beneficiaries. Many of the permanent life insurance policies also feature an investment option. Policy holders may withdraw money invested in the policy for various reasons, such as college education or for other unforeseen expenses. The money invested in these types of policies is tax deferred. Policy holders will not be responsible for taxes unless money is withdrawn from the policy.
Disadvantages to Permanent Life Insurance
Permanent life insurance is more expensive than term life insurance. Each insured person must examine their financial situation to determine if permanent life insurance will suit their budget. Permanent life insurance will also involve a health history inquiry, medical examination and other forms of historical documentation. Policy holders should be aware of this before investing in life insurance. Any loans that are taken out during the duration of the policy will be owed at the time of the policy holder’s death. If the loans are not repaid, this will reduce the amount the beneficiary will receive. Each disadvantage should be considered prior to investing in a permanent life insurance policy.
Types of Permanent Life Insurance
Whole Life Insurance
Whole life possesses a policy premium that remains the same for the entire policy. The premium cost calculated may be higher in the beginning of the policy, but may decrease over time as the policy and the policy holder ages. Policy holders typically pay more initially. Higher payments will lower the payments for the policy holder in the event of an income decrease during retirement.
Whole life insurance carries a cash value that is guaranteed by the insuring company. The death benefits are guaranteed and typically, known at the time of the policy holder’s death. Policy holders may add riders to increase the death benefit. The riders will require an additional premium. Policy dividends may also be used to increase the value of the policy. These dividends may not be guaranteed.
At any time during a whole life policy, the policy holder may determine the cash value of the insurance policy. If a loan is taken out against the policy, pay back is optional. Neglecting to pay the loan back will only decrease the value of the policy. Whole life insurance possesses a small rate of return when compared to other investments, such as annuities and other conservative investment vehicles. Some individuals may benefit from using other investment tools rather than whole life insurance.
Universal life is a more flexible type of permanent life insurance. This type of insurance allows the individual to make changes to the life insurance policy at any time. The cash in a universal life insurance premium will accumulate tax deferred throughout the duration of the policy. Policy holders may increase, decrease or skip premium payments. However, policy holders must meet the target payment over a given period. The policy may also increase their death benefit or decrease it as necessary. The cash value of a universal policy is not guaranteed. A universal policy is more of an investment tool. The cash value will vary depending on the performance of the investments.
Another type of permanent life insurance is variable life insurance. This type of insurance provides coverage until the policy holder dies or the amount is withdrawn from the account. Variable life insurance allows the policy holder to select where their premium contributions will be invested. A variety of investment options are offered by insurance companies. Individuals may be as aggressive or conservative with their variable insurance premium investments as they desire. Policy holders may select from a portfolio of mutual funds. Mutual funds include stocks, bonds and money market funds.
Premiums for variable life insurance policies are fixed. The death benefit will also never fall below a predetermined level. This will ensure that beneficiaries will always receive the amount that was initially established in the policy. While the prospect of gaining more profit is greater with a variable life insurance policy, there is also a great chance that the policy may lose cash value as well. This type of investment is not recommended for investors who are not experienced. There are also more fees and charges associated with this type of life insurance policy.
If the face value of the policy falls too low, the insurance company may request that the policy holder pay more in premiums to prevent the policy from lapsing. Increased premium payments may not fit with a person’s budget. A diversified portfolio may decrease the likelihood that the entire value of the policy will decrease. Any losses will be offset with investments that perform well in the portfolio.
Variable Universal Life
Variable universal life insurance is a combination between variable life insurance and universal life insurance. The policy holder has more control over the cash value of the policy with variable universal life insurance. Individuals who desire to have more control over the investment vehicles used in their life insurance policies will find that this type of policy offers more flexibility. The cash value of the death benefit depends on the performance of the investments. Stocks, bonds and money market funds are often used as investment vehicles for variable universal life insurance.
Most insurance companies will guarantee a minimum death pay regardless of how poorly investments perform. This gives investors some peace of mind that their beneficiary will receive an adequate payout after their death. The universal life insurance policy allows policy holders to make changes to the premium amounts and to the payout after death. The variable life insurance policies are also tax deferred. Policy holders have the option to borrow against cash value.
Survivorship Life Insurance
This particular type of life insurance policy allows two spouses to hold a policy together. The beneficiaries will not be paid, however, until the second spouse on the policy dies. The premiums on this type of policy are typically higher because two people are covered on one policy. This policy is designed to protect the heirs of the survivorship life insurance from estate taxes. Most individuals who require this type of policy have a net worth over $2 million. This type of policy will preserve the value of an estate after the policy holders pass away.
Before securing this type of survivorship insurance, potential policy holders should consult with legal and tax professionals about their particular estate. These individuals may advise a person of the best life insurance to purchase for protection of their estate. Because this life insurance policy is designed for the affluent, premiums will tend to be higher.
Policy holders should be aware that federal laws permit an estate to be passed on to a spouse tax free. Taxes will be assessed if passed on to the heirs. Survivorship insurance will provide funds needed to pay estate taxes. This will eliminate the need for heirs to liquidate the estate. In some instances, estate taxes can be as much as 55%. The amount varies depending upon the size of the estate. Survivorship insurance is essential for heirs who may not have the means to pay those types of taxes.
Joint Life Insurance
Joint life insurance will pay out when the first spouse dies. This life insurance policy is designed to protect the surviving spouse financially. Joint life insurance is less expensive than survivorship life insurance. Survivorship protects the estate when passed on to the heirs. Joint life insurance covers the spouse. Joint life insurance covers only one person; however, both spouses will be present on the policy to designate who the funds will go to in the event the other dies. The policy premiums will differ based upon the policy holder’s ages, their health and the coverage requested. The policy may either be present as a whole life coverage or term life coverage. If one spouse is healthy and the other is not, the policy will be easier to underwrite.
Convertible Life Insurance
Convertible life insurance policies are a nice compromise between term life insurance and permanent life insurance. Convertible life insurance offers the affordability of term life insurance with the option of converting the policy to a permanent life insurance policy. This policy will prevent policy holders from losing money if their policy period lapses. Purchasers of this type of policy will enjoy low premiums until they are financially able to purchase a permanent policy.
Purchasers of this policy are not required to have a medical exam at the time of conversion. As long as the policy has not lapsed, the policy holder may automatically convert at the time they feel most comfortable. Convertible life insurance offers the best of both policies in one policy. Higher premiums will be assessed, when the permanent policy goes into effect. All potential convertible policy holders should verify the option to convert at any time.
Key Man Life Insurance
Key Man life insurance protects an individual’s business after a key owner passes away. Small businesses may have one or two members that the business is dependent upon. These people have specific knowledge of the business that is irreplaceable. They may also have key client relationships or resources that are irreplaceable. If one of the business owner’s dies suddenly, then the money from the policy may be used to keep the company from dissolving. This insurance will also protect employees’ jobs, if there is a sudden death. Small businesses will give their employees time to find a job in the event the business will not survive without the business owners.
Key Man life insurance may also protect the company against company debts, loans or other financial problems after the business owner dies. The debts will be paid soon after the key owner passes away. This is a cost effective means of securing a business.
There are many other life insurance types that will help individuals ensure that their survivors are cared for after their death. Each individual, regardless of income, is eligible for life insurance. Simply select the policy that best suits the budget of the policy holder.
Research the various insurance companies. Ask copious questions to determine the terms of the policy. Ensure that the policies meet the needs of the survivors in the event of the policy holder’s death. Research will provide confidence that there will be no surprises when the policy holder passes away.
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