While everyone talks about life insurance today, it is one of the vital parts of financial planning and shouldn’t be ignored while determining your long-term goals. According to the Insurance Barometer Report from LIMRA and Life Happens 2022 states that 31% of people said they need a life insurance policy Despite the awareness about policy, this could be perplexity among types of life insurance or overestimating the cost of the insurance policy.
Moreover, the perception of life insurance product cost, features, and value can deter individuals from buying it. In the Insurance Barometer Report, about half of the respondents stated that for $250,000 term life insurance for a healthy 30-year-old healthy individual would cost $500 a year or even more. Whereas in reality, the average cost for life insurance is around $170 a year, this shows major divergence among people in perceived policy cost and life insurance product.
Don’t worry, this blog is all about debunking the myths and taking you on a path to comprehending what is life insurance different types of insurance, and more.
What is Life Insurance?
Life Insurance is an official contract between the insurer and the insurance company. An insurance company offers a lump sum amount of death benefit to the beneficiaries after the death of the insurer in exchange for the premium that he or she pays for a specified tenure. Whether your goal for buying a life insurance product is to save up for a retirement plan or if you are on the journey of raising your child and family, this type of insurance policy ensures complete financial security for your spouse and or family after your death.
The beneficiaries can opt for using the money for any reason, however, the majority of the family chooses to pay off their big bills, debts, or mortgage and sometimes uses this money to put their child through college and other educational fees. If you are still wondering, what is life insurance? It serves as a safety net that ensures the family's financial protection and stability after the death of the insurer and the family can pay for things that the insurer had planned for.
Have you ever heard of different types of life insurance and struggled with distinguishing the difference, premium level, and cost value of each type? Don’t worry, you are not alone. There are two main types of life insurance - Permanent and term life insurance. Permanent life insurance includes whole life insurance or universal life insurance that offers lifetime coverage to the insurer, whereas term life insurance provides coverage for a specific period only.
What does the Life Insurance Policy cover?
The life Insurance policy covers death from all causes, with one exception Suicide within the first 2 years of buying the life insurance product. Apart from that, life insurance covers death from illness, homicides, accidents, and disease.
However, irrespective of the cause of the death, if the insurance company finds that there was some misrepresentation of life insurance then your claim for the coverage may get rejected, especially if the death of the insurer occurs within the initial years of buying the policy. For instance, if an insurer lies about their health or other information then an insurance company would deny to proceed with the claim.
In the rarest cases, life insurance claims can be rejected if the insurance company found the beneficiary had murdered the insurer. Or the claim can be denied if there are any disputes regarding the claim stating that the insurer was constrained chaining the beneficiary.
Benefits of Life insurance
While the reason for buying life insurance is very personal and varies from individual needs and lifestyle. However, the decision for buying life insurance remains the same for everyone, securing and protecting your loved ones financially after your death. Let’s have a closer look at the different benefits of life insurance.
Powerful Income Replacement
Just imagine, you are the sole earner in your family and what would happen to your family after your death. Don’t worry, that’s where life insurance comes to the rescue! By buying a whole life insurance policy, you can ensure that your family gets an essential security that serves them as a basic income each month. Life insurance can fulfill the needs of beneficiaries like:
- Affording healthcare, childcare, education, and more.
- Cutting off household debt
- Paying mortgage
- Can help protect a family business
Guaranteed Growth with Cash Value
The whole life insurance policy builds cash value as you pay premiums for the policy until it guarantees growth further with deferred tax can help you meet varied financial goals effectively.
- Paying off mortgage
- Funding a child’s education
- Protecting existing assets
- Retirement income source
- Securing emergency funds
Tax-Free Perks
The benefits of life insurance aren't restricted to securing the beneficiary's life but the income of life insurance is passed through federal tax-free income. In short, beneficiaries can enjoy or make use of every penny they get from the insurance company.
Financial Safeguard
If you have a family, business, or people who depend on you financially, then life insurance is a must-have option for you. Don’t worry, the benefits of life insurance like a whole life insurance policy can serve as the safest financial net for your loved ones after your death.
When an insurer dies, his or her beneficiaries would receive a lump-sum amount of money from the insurance company (except all premiums are paid on time by the insurer and there is no left loan or other debt left). It is a reliable, safest, and essential source of financial planning for your family after your death that you can count on.
Potential for Dividend
One of the best benefits of life insurance (whole life insurance) is you can be eligible to receive dividends. However, it isn’t guaranteed to insurers, but when dividends are awarded, you can opt to collect them as cash. Use them as offsetting your premiums for the policy, or use them for additional paid benefits or features of insurance that adds on cash value and coverage and more.
Availability to opt for riders
There are hundreds of ways that you can customize your life insurance policy to meet your needs. However, you can opt for buying riders to buy additional financial protection without additional underwriting to pay off your premiums if you are disabled due to any circumstances.
Furthermore, you can use a small amount of face value to pay for chronic illness and to purchase coverage for your childcare and other hefty expenses associated with your child’s education and more. If you are confused among different rider options, your agent from the insurance company can assist you to select the right alternative.
Types of life insurance policies
When it comes to actually comparing the vivid types of life insurance policies, that’s when everyone finds it a difficult job to do. Don’t worry, we have made comprehending types of life insurance policies quite easy for you. Here is a quick sneak peek for you to understand the basic differences between all types of life insurance
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| Types of life insurance policies | Length of policies | Policy premiums | Cash Value | Death benefit |
| Term Life Insurance | Term period varies from 5,10,15,20, 30 years | Level, annual, renewable, decreasing, and more | No | Fixed |
| Variable Life Insurance | Permanent | Level | Yes | May fluctuate |
| Whole Life Insurance | Permanent | Level | Yes | Fixed |
| Burial Life Insurance | Permanent | Level | Yes | Fixed |
| Universal Life Insurance | Permanet | Flexible | Yes | Flexible |
| Mortgage Life Insurance | Only in effect for mortgage | Fluctuable | Yes | As you pay down mortgage, declining death benefit is offered |
| Credit Life Insurance | Permanent | Level | No | Pays off the remaining debt directly to lender |
| Survivorship Life Insurance | Permanent | Varies | Yes | Pays off only after second person dies |
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What are the Different Types of Life Insurance?
We are sure you have gotten the basic idea of types of life insurance, however, if you are still wondering, what are the different types of life insurance? We are listing below the essential life insurance types in detail to help you select an ideal policy as per your needs and estimated cost budget.
Term Life Insurance
- Length of policy: Varies from 5 to 30 years
- Premium options: Level, renewable, decreasing, and annual
- Cash Value: No
- Death benefit: Fixed
Term Life Insurance has a fixed end date for the selected level of the period, the rates remain the same. You can renew the life insurance policy, at a higher rate each year. Term life insurance is one of the most affordable options as the insurer only buys the coverage of the policy for a specified period and not for the cash value life insurance.
Ideal for: A term life insurance policy is beneficial for individuals who want insurance coverage for a particular debt or situation. For instance, few people buy term life insurance to cover their working years so that the coverage serves as income replacement for their family, or to pay off the mortgage or big debt in case insurers passed away suddenly.
Variable Life Insurance
- Length of the policy: Permanent
- Premium options: Level
- Cash value: Yes
- Death Benefit: may fluctuate
Variable life insurance pays permanent or lifetime coverage and cash value to beneficiaries. The policyholder needs to decide on a sub-account wherein the insurer decides to invest. Based on this account, the cash value growth is determined. However, policyholders can lose their money based on the subaccount's performance.
Ideal for: Variable life insurance is beneficial for individuals who seek lifetime coverage, and cash value and who wish to take an active role in insurance policy investment. The buyers of variable life insurance are the risk takers.
Whole Life Insurance
- The length of policy: Permanent
- Premium options: Level
- Cash value: Yes
- Death Benefit: Fixed
Whole life insurance is purchased by people as it offers coverage for a lifetime. An account with a whole life insurance policy builds a cash value over some time. Using a certain amount from the premiums paid by the policyholder adds up the overall interest. Whole life insurance guarantees that the premium won't increase, policyholders will earn cash value based on the fixed rate of interest, and the death benefit remains the same.
Ideal for: Whole life insurance is for individuals who want coverage for their entire life and are willing to pay premiums for guaranteed benefits.
Burial Life Insurance
- The length of policy: Permanent
- Premium options: Level
- Cas value: Yes
- Death benefit: Fixed
Burial life insurance is also referred to as final expense or funeral life insurance. It is a small life insurance to provide coverage for a funeral or final expenses to the beneficiaries. Among all types of life insurance, burial is a type that cannot be put down and does not have criteria for undergoing medical examination.
Ideal for: Burial life insurance can benefit individuals with poor health conditions who do not have any backup with their life insurance policy and highly need money or coverage for funeral expenses.
Universal life Insurance
- Length of policy: Permanent
- Premium options: Flexible
- Cash value: Yes
- Death benefit: Flexible
Among all the different types of life insurance policies, Universal life insurance can be difficult to comprehend due to the varied available options and features. The universal policy is an affordable alternative to Whole life insurance as this type does not offer the same kind of guaranteed benefits.
With a few types of Universal life insurance, you can have varied premium options and can modify your death benefit account under a few limitations. In addition, Universal Life Insurance has a benefit of a cash value component.
Ideal for: Universal life insurance can be the best option for someone looking for lifelong coverage. And some kinds of Universal life insurance are suitable for people who wish to tie the growth of benefits of cash value with market performance.
Mortgage Life Insurance
- Length of policy: Life of mortgage
- Premium options: Fluctuable
- Cash value: Yes
- Death benefit: As you pay down the mortgage, the declining death benefit is offered
Mortgage life insurance is beneficial to pay off your mortgage. Among all types of life insurance, this alternative is different in many ways. Firstly, in this type, the death benefit is provided to the lender directly and not to the beneficiary. Next, the payout is the balance for your mortgage.
Ideal for: It is designed for individuals who are worried about their family being pressured to pay off the mortgage after their death.
Credit Life Insurance
- Length of policy: Permanent
- Premium option: Level
- Cash value: No
- Death benefit: Pays off the remaining debt directly to the lender
Like Mortgage life insurance, Credit life insurance focuses on paying off a certain debt. When you take a home loan, allowance of credit life insurance to pay the debt. The payments or premiums for this insurance type are directly connected to loan payments, and the payout balance for the loan is directly provided to the lender and not to the family.
Ideal for: If you have major debts with you and fear of passing on the burden of these debts after your death makes you worried all the time then Credit life insurance can be a convenient and ideal option for you.
Survivorship Life Insurance
- Length of policy: Permanent
- Premium options: Varies
- Cash value: Yes
- Death benefit: Pays off only after the second person dies
Survivorship life insurance is a joint life insurance policy that ensures there are two people associated under one policy, like husband and wife. The payout or coverage is given to beneficiaries only when two of them have passed away. It can be an affordable option than buying 2 different insurance policies specifically when one of them has health issues.
Ideal for: Beneficial for estate planning when the insurance money is not required for the beneficiary until both of them have died. In addition, this type of insurance can be used to fund a trust as well.
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Bottom Line
When it comes to financial security everyone is concerned about selecting the right option. We hope this blog helped answer your doubts like what are the different types of life insurance policies and more.
Every policy has varied features and benefits that can assure you of financial security for your family and loved ones even when you won’t be here. Based on our primary needs, and financial goals you must select an ideal life insurance. However, you can contact the insurance company either by visiting their office or online. Or if you are looking for a thorough advisor, then looking for an agent or broker can be the best decision for you.
Frequently Asked Questions
According to the recent LIMBRA data, Whole and Universal life insurance is the most preferred insurance policy as it entails one-third of market shares from insurance premiums. However, as per the data for the financial year 2020 and 2021, the number of Universal life insurance has comparatively increased to 69%.
The 3 main types include - Whole life insurance, Universal life insurance, and Term life insurance.
Permanent life insurance like Universal, Whole, and Variable life insurance are considerable investment options. The cash value of these policies builds over time and permits the insurer to touch the policy while he or she is alive. However, the investment options that assist in building cash value vary on the insurance type.
