Whats
the difference
between all these
types of insurance?
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When choosing a type of life
insurance, it is important to know the differences between
them. Some types are better than others depending on
your family or personal needs.
The information below outlines some important features about
each type of insurance.
It is a good starting point for understanding your insurance
needs. You should always
consult your tax advisor and attorney when purchasing
insurance products. The
differences of the types of life insurance are outlined below
for your convenience.
Term
Life Insurance |
Term
life insurance is the lowest cost and simplest product
available. Term insurance is a life insurance contract
that provides protection for a limited number of
years. The death benefit is only payable if death
occurs during the agreed-upon term. If the insured
survives the time period, the policy expires. This
means it has no cash value. However, some policies
have a convertible feature permitting a policyowner to
exchange a term policy for a cash value policy without
evidence of insurability. Term is basically designed
to provide a maximum amount of protection for a
temporary period of time.
Term
is sold in a variety of forms and for a variety of
purposes. The most common type is Level Term. This
form has a level (or constant) death benefit and a
level premium for a specified number of years. The
most common are 1, 5, 10, 20, and 30 year terms.
Decreasing Term is another version of term insurance.
It is generally sold with a level premium and a
decreasing death benefit. A variation of decreasing
term is Mortgage Life Insurance. This is designed to
decrease at the rate in which a mortgage balance
decreases. Mortgage Life is typically offered as a
rider in connection with a cash value policy.
Advantages/Disadvantages
of Term Insurance
Term
insurance is ideal for families where protection is
needed, but a minimum outlay of funds is necessary.
Term also works well as a supplement to cash value
insurance. Another common purpose of term insurance is
to purchase it as protection against debts such as
mortgages, auto loans or education loans.
On
the negative side, term insurance provides only
temporary protection, and there may come a time when
an insured has no protection after the term policy
ends.
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Whole
Life Insurance |
Whole
life provides a death benefit and an accumulating cash
value. By definition, it has a fixed premium and a
level death benefit to age 100. The premiums don't
increase with age, which averages the cost of the
policy over your life. The cash value increases with
time until it equals the death benefit at age 100.
Whole life is also known as Ordinary (or Permanent)
life insurance. This type of policy never has to be
renewed or converted. The cash value is an amount of
money that you are guaranteed to receive in the event
of policy cancellation. You also have the right to
borrow against the cash value on a loan basis.
There
are several variations of Whole life. The most common
are Modified Premium and Graded Premium. These
policies are used when whole life protection is
needed, but can't be afforded. Modified Premium
policies typically have a lower fixed premium for the
first 3 or 5 year period, at which point premiums
increase. Modified policies work well for individuals
that expect to improve their financial condition.
Graded Premium policies are similar, except the
premium increases each year for the first 5 years, and
then becomes fixed after that. Another common version
of whole life is Limited-Pay. These policies are a
variation that make it possible to stop premium
payments at the end of a specified time period without
a reduction in the death benefit. In other words, the
policy becomes fully paid prior to age 100. The most
common examples of this are 10 Payment Life, 20
Payment Life, or Life Paid up at 65.
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Variable
Life Insurance |
Variable
Life is another interest-sensitive form of insurance.
The purpose of variable life is to combine the
protection features of life insurance with the
investment potential of common stocks. The key to this
sort of policy is that the death benefit is completely
variable. The insured has the option of choosing
between several different investment mediums: stock
funds, bond funds, real estate funds, or any
combination. These contracts do provide a minimum
guaranteed death benefit. The actual death benefit
could be higher depending upon the performance of the
investment vehicle chosen. Because it does rely upon
the market’s growth, the cash value also fluctuates.
There is absolutely no guarantee to the amount of the
cash value. Unlike universal life, the premiums paid
are fixed. There are policy provisions that allow
loans to be made from the cash value.
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Universal
Life Insurance |
Essentially,
Universal life is a combination of term insurance
protection with the cash savings value of whole life.
Interest rates paid on the cash value are typically
higher with Universal life than Whole life because
they tend to follow the markets. This type of contract
is designed with flexibility in mind. Premiums can be
paid in a lump sum, annually, or anywhere in between.
Interest on the cash value is usually guaranteed, but
will vary according to the investment performance.
Each month deductions are made from the cash value
fund to support the costs of the insurance protection.
As long as the cash value is substantial enough to
maintain the monthly costs, the policy will remain in
force. Typically the death benefit reduces in
proportion to the increase in cash value, thus causing
a level death benefit.
Another
form of Universal life is Variable Universal Life.
Variable Universal life combines the growth potential
of stocks with a guaranteed death benefit. This type
of policy allows premiums to be paid, reduced, or
skipped at any time, and the contract will not lapse
as long as sufficient cash value exists. The cash
value fund can be split between different investment
mediums such as stock, money market, and bond funds.
The
key to any form of Universal Life is that it's
interest-sensitive and allows for an adjustable death
benefit.
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Burial
Life Insurance |
Burial
insurance, also known as final expense or simplified
issue life insurance is essentially a whole life
insurance product with a simple application process
and small face value. Typical face values range from
from $5,000 to $25,000 although policies can often be
written outside of that range. This type of insurance
is designed to be conveniently purchased without the
requirement of a medical exam or a complex
questionnaire. Applications can be completed over the
phone, only a few health questions are asked and no
home visit is ever required.
This
type of policy is ideal where the primary concern is
the payment of final expenses such as:
- Medical
Bills
- Funeral
Expenses
- Outstanding
Debts
- Administrative
Expenses
Aside
from the simple application process this type of
insurance features:
- An
accumulating cash value that is available for
emergency expenses.
- A
death benefit that never decreases.
- Premiums
that never increase.
- Policy
cannot be canceled regardless of age or health as
long as premiums are paid.
- Accelerated
death benefit: Receive up to 50% of the death
benefit early if diagnosed with a terminal
illness.
Types
of Final Expense Insurance
Immediate
Full Death Benefits are generally available to
qualifying applicants when no serious or immediate
health concerns are presented.
Graded
Death Benefits are available when serious health
concerns are presented. Graded plans provide limited
benefits during the first few years of the policy.
Guaranteed
Issue Benefit Plans may also be available to you if
your health makes you ineligible for for the standard
or graded burial insurance products. These are
available regardless of health and provide a graded
benefit that provides a full death benefit after three
years of policy payments and limited benefits before
that.
Typical
Payment Plans Available:
A
Level Pay Plan calls for premiums to be paid for the
life of the policy.
A
10 Pay Plan calls for premiums to be paid for 10
years.
A
Single Pay Plan requires only one premium payment.
10
pay and single pay plans will often include an annual
growth rate on the death benefit.
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