In this article, we are going to give you the life insurance basics you really need to know before you make any decisions. Unfortunately, there is a lot of misinformation spread out there by financial entertainers, bloggers, inexperienced agents or closed minded salespeople that believe one size fits all. The truth is, all life insurance policy types have a specific purpose. Some are more complicated, more expensive, some are temporary and others are permanent.
A clear understanding of the differences is the point of this article. The nuts and bolts we are providing here should get you a good general understanding of what Life Insurance is and is not.
First and foremost, life insurance protects against financial loss associated with the death of an insured person whether that is your life or someone else. Coverage insures the inherent financial value of the insured individual’s life to those around them. The financial value of the insured is transferred to the beneficiary(s) of the policy.
A life insurance policy will always contain a named insured, a policy owner (who could also be the insured) and a named beneficiary(s). The beneficiary(s) or “financial recipient(s)” are typically at the discretion of the policy owner and can be changed if needed while while policy owner is able to do so.
Life insurance pays out a sum of money either on the death of the “insured person” or after a set period of time. In the event of death of the named insured, a “death benefit” is paid to the defined beneficiary or beneficiaries in the policy.
Most Common Types of Life Insurance
There are 2 very distinct classes of protection that makeup all of the different life insurance products on the market. They are the basis of all life insurance products out there. Those two classifications are either Temporary or Permanent Life Insurance. You will need to know whether you are thinking temporary or permanent protection as you move forward. It will make things a lot easier “to get your head around.” It also eliminates consideration of a particular type of life insurance as well.
Term Life Insurance
- Term life insurance, is temporary life insurance and as such only provides coverage for a limited period of time. Typically 10, 15, 20, 25 or 30 years. It is considered pure death protection. The term of the policy is selected at application by the “policyholder” (paying party). After that “term” or period expires, the life insurance coverage at the previous term rate or cost is no longer guaranteed.
- Premiums will go up sharply at the end of the “term” and should be considered before purchasing a policy in case their is a change in health during the term. During the “term” or when you are paying a premium to the life insurance company and the insured dies, the death benefit will be paid to the beneficiary named by the policy owner.
- Since it is not permanent insurance, the cost is much less.
- Term life insurance provides the greatest amount of pure death protection for the lowest premium when compared to any other type of life insurance policy. However, there is a usually a maximum age which the insured will not be covered and cannot be renewed at the higher premium.
- Term life insurance has no cash value or other living benefits.
Whole Life Insurance
- Whole life insurance, is a permanent life insurance policy that remains in force for the insured’s whole life. The policy may pay the policy owner dividends if it is a participating or “par” policy.
- Simple lifetime protection that has an additional cash value account accumulating in the policy and requires (in most cases) that premiums to be paid every year into the policy.
- This type of policy is always more expensive due to the increased benefits and that coverage is permanent.
- Additional benefits and lifetime coverage regardless of change in health make this the most expensive type of coverage.
Universal Life Insurance
- Another type of permanent life insurance. Typically less expensive than whole life, but a bit more complex under the hood.
- In additional to the face amount (death benefit) is also typically has a cash value account built in.
- The difference with universal life coverage is that premiums are adjustable (flexible), but do create some complexity you will not see with traditional whole life insurance. Under the terms of the policy, the excess of premium payments above the current cost of insurance which is based on an automatically and renewing 1 year term life insurance is credited to the cash value of the policy. The cash value is credited each month with interest, and the policy is debited each month by a cost of insurance (COI) charge, and any other policy charges and fees which are drawn from the cash value, even if no premium payment is made that month.
- Interest credited to the account is determined by the insurer, but has a contractual minimum rate of 2%. When an earnings rate is pegged to a financial index such as a stock, bond or other interest rate index, the policy is a “Equity Indexed Universal Life” contract.
- There are many different kinds of universal life insurance beyond the scope of this article. Our most recommended universal life product is called No-lapse or Guaranteed Universal Life. This offers the financial security of permanent protection with “term-like” insurance rates.
High Risk Life Insurance
High risk life insurance is really a rated life insurance policy rather than a type. Insured individuals who have a very elevated risk compared to other people their age. High risk life insurance can be temporary or permanent coverage depending on your needs. But what defines higher risks? Well, there are a few categories that are considered high risk. They fall into the following:
- High risk medical conditions: If you have been diagnosed with a serious or life threatening disease such as cancer, pancreatic disease, epilepsy, diabetes, or Alzheimer’s, you are very likely considered high risk.
- High risk professions or occupations: Several occupations can put you into the higher risk category. People in high risk professions include underwater welders, underground miners and firefighters.
- High risk hobbies: You may work at a safe job during the week, but you may still be considered high risk if your weekends involve a hobby such as skydiving, racing cars or scuba diving.
- High risk habits: If the insureds lifestyle can be high risk, such as smoking cigarettes or cigars, or chewing tobacco it will generally be considered high risk with some exception.
Hopefully you have got the life insurance basics under your belt now. Products do very greatly in cost. As risk increases to an insurer, the cost of insurance will rise, period. A permanent form of life insurance will obviously cost more than a temporary one. For more information, check out this resource from The Simple Dollar. This article might be helpful here if you are still on the fence on what type of coverage you may need.
If you haven’t already, be sure to get an instant quote from the tool right here. Find out how much you might expect to pay for the type of life insurance you need. Becoming educating is part of the process, now it is time to start getting some numbers to see how it aligns with your needs and budget.
In the end, as you move forward with purchasing coverage, it is very important you speak with a seasoned and independent life insurance expert. He or she is going to be able to point you in the right direction and ultimately help you secure the most affordable coverage you can obtain.
Our interest is in helping you sort out what is most important to you and how to obtain ideal protection for your family and/or business. What follows is absolute peace of mind…financial security.
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