Choosing life insurance can be made a little more difficult due to the different options that you have. In order to help you get a better idea of your options, here is a guide to types of life insurance you might run into, divided into classifications of term and permanent. It is important to note that available insurance varies by state and by country, and rules regarding suicide vary as well. You should do your homework ahead of time to make sure of options applicable in your local area.
Types of Term Life Insurance
Many people are neglecting their finances by not having life insurance. If you are worried about cost, term life can be helpful. Term life insurance is life insurance that expires. You pay a specific premium, and you receive coverage for a certain amount of time. Once the term is over, the insurance expires without additional benefits. You might be able to renew your policy, though. While there is no option to invest your premiums and build cash value, some insurance companies will refund a portion of the premiums paid if the term life insurance expires before the insured party dies. Here are some of the types of term life insurance:
- Level Term: This is probably the term life insurance policy type you are most familiar with. With level term, you pay the same premium for the term of the policy, which is usually between five and 40 years. The pay out remains the same as well.
- Annual Renewable: With this type of term life insurance, you renew each year, since it is an annual policy. You are guaranteed a reissuance of the policy for an equal or lesser amount - no matter how insurable you are. The premium is set each year for your age.
- Mortgage Life Insurance: This is a decreasing term life insurance policy. It is meant to pay off a mortgage if the insured dies before the mortgage is paid off. The benefit decreases as the mortgage progresses toward repayment. The premium, though, remains the same (and is usually fairly inexpensive).
- Increasable Term Life: Some insurers might allow you to periodically increase the coverage you receive. This can be useful if you expect to earn more money throughout your life, but can't afford higher premiums right now. The premium will increase as the value of the insurance increases.
- Convertible Life Insurance: In some cases, you might be able to convert your level term life policy to a whole life policy at the end of the term if no claims have been made.
- Family Income Benefit: Another decreasing benefit policy, this one is designed to replace lost income. If the insured dies, regular payments are made to the family until the term ends, or a lump sum is paid out.
Types of Permanent Life Insurance
Unlike term life insurance, which expires after a set period of time, permanent insurance policies remain intact until the insured dies - as long as premiums are paid and there is no evidence of fraud on the application within a set period of time. Permanent insurance policies build cash value, which means that policyholders can borrow against the money built up. Additionally, those with permanent life insurance policies can also surrender the policy before death and receive cash. Here are the main types of permanent life insurance:
- Whole Life: If you are looking for a guarantee with your permanent life insurance, whole life insurance might be the right product. There are guaranteed cash values, as well as a level premium that lasts throughout the life of the policy. Some whole life policies offer the option of receiving policy dividends (that are not guaranteed). Check with your insurer about death benefit policy; many whole life policies will not offer the accumulated cash to survivors, only paying the agreed death benefit.
- Universal Life: In addition to your premium, you can choose to put an additional amount of money in when you have a universal life insurance policy. The insurance company will invest this additional amount (usually in bonds or mortgages) and put the returns into the account that builds cash value. This account can be used to help you pay premiums, or it can be used to build cash value. Depending on the type of account you have, the cash built up may be paid out to the survivor (or not).
- Variable Life: This is a type of universal life insurance policy. However, you have a wider selection of investment products, including stock funds. It is possible to get equity indexed variable life policies that offer the possibility of higher returns for your cash account. Make sure you understand the options for what happens to cash you build up.
- Accidental Death: Accidental death and dismemberment policies are meant to pay a benefit when an accidental death occurs. In some cases, you can get a policy that includes dismemberment, paying a benefit for the loss of use of different body parts. As long as premiums are kept up, this insurance is in effect until the death of the insured.
- Limited Pay Policies: If you are willing to pay higher premiums up front for a number of years, you can get permanent insurance that lasts even after you stop paying premiums. These policies allow you to pay a premium for 10 or 20 years, or until you reach a certain age, and then continue to be covered for the rest of your life without having to pay anymore premiums.
- Endowment: This is an interesting type of life insurance policy that provides the death benefit at a certain age or after a specific number of years - even if the insured person is still alive. This is considered permanent life insurance, since it remains in force until the endowment age or death. Tax rules for endowment life insurance policies are similar to those followed by annuities.
Life insurance is one of the important items on a money to-do list. Before you get any life insurance policy, you should consider your needs, and carefully consider the coverage that would be most appropriate for you. Review your financial goals, and what you would like your life insurance to accomplish, and how much life insurance you need. You might even want to consult with a financial professional. Once you have ascertained your needs, then you can choose from amongst the 12 main types