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The well-being of your family after you’re gone may worry you. If they rely on your income to meet various financial obligations, then it may be a good idea to sign up for life insurance. After all, you want them to be able to keep up with the lifestyle you’ve worked so hard for in the United States. A life insurance policy can be initiated with an insurance company, who will provide a lump-sum payment in the case of your passing. It’s called a death benefit and will be given to the beneficiaries you specify on the policy.
This article explores the different types of life insurance options that are available to you.
This includes term, endowment, whole, and universal life insurance. You will also learn about other uncommon types of life insurance such as first-to-die, survivorship, and credit life insurance.
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Term Life Insurance
Term life insurance is a type of insurance that provides pure insurance protection that pays a death benefit if the insured dies in a specified term. The protection lapses at the end of the term unless the contract is renewed. Generally, the premium may increase annually or may be constant for a set number of years after which the premium will increase. There is usually no cash value, savings or investment component to a term life insurance.
Term life insurance is very inexpensive for people that are young. Some provisions that are associated with term life include a renewable and a convertible.
In a renewable provision, the policy can be renewed until the age of 70, and the premiums increase exponentially as the insured ages.
A convertible provision simply means that the policy has a provision to convert the term life into a permanent insurance policy without evidence of insurability up to a specific age.
Term life insurance is appropriate for individuals that are looking to cover temporary life insurance needs and cannot afford higher costing premiums.
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Types of Term Life Insurance
Annual renewable term (premium increases annually)
Level term (3,5,7,10,15,20, or 30 years. Premium remains the same for the selected term, but increases when the policy is renewed)
Term to age 65 or 70 (increasing premiums and policy cannot be renewed up to a certain age)
Decreasing term (Level premium with a decreasing face amount, the death benefit decreases over time)
First-to-die (Used in buy-sell agreements and for mortgage protection, paying off debt, and education expenses)
Second-to-die (The face value is paid upon the death of the second insured)
Term life insurance is meant to be utilized for temporary life insurance needs. It can provide a large death benefit at a low cost. However, if you are already financially independent, then life insurance may be unnecessary. The policy is cash flow driven, meaning the lower the cost of the policy, the greater the current cash flow that the owner is able to have.
Term life insurance has a limitation of an increasing premium for entering at an older age or renewing, which causes most policies to lapse. Most term life insurance policies lapse without the collection of the death benefit by the beneficiary. Term life has limited or no cash value at all. Due to this, it may not meet permanent insurance needs because the insured may outlive the period of renewability.
Endowment Life Insurance
There are two types of endowment life insurance that you should know.
Pure Endowment Life Insurance (Not Sold In The United States)
This type of policy pays the face value if the insured survives the endowment period.
Regular Endowment Life Insurance
This policy pays the face value as a death benefit if the insured dies within the endowment period. If the insured survives beyond the endowment period, the face value is paid. Regular endowment policies combine the death benefit of a term insurance component with a savings component.
Whole Life Insurance
Whole life insurance provides lifetime protection when premiums are paid as outlined in the policy. The policy refunds future higher mortality costs using a present value analysis. Premium patterns can differ from a variety level to an increasing premium.
Whole life insurance also offers a cash value component in which earnings on the cash value are credited to the policyholder. The cash value may be used for loans or to pay premiums and can be received if the policy is surrendered. Generally, cash values have a minimum guaranteed rate of interest.
Whole life insurance is appropriate for people who have long-term insurance needs or a desire in the cash savings/investment feature.
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Types of Whole Life Insurance
In a whole life, premiums are level and are paid for life or until age 100. The face amount of insurance remains constant for life. Whole life policies usually benefit those who have lower risk tolerances because the insurance companies guarantee a minimum cash value that builds up. The cash value is invested in the insurance company.
The face amount of protection remains constant for life, but the premiums are paid for a specific term after that. No further premiums are due.
Graded Premium Whole Life
This policy has a low first-year premium but increases each year for the early policy years. Afterward, the premium levels off, usually within five to ten years.
Modified Premium Whole Life
The premiums for this type of life insurance are lower for the first three to five years. Then the premium increases slightly more than a whole life premium would or an ordinary life policy at the insured age.
The policy comes with a premium that is fixed, but the face amount may vary with no guarantee of cash value. However, the insured is able to choose from a wide variety of investment options. The death benefit is able to increase in value, but cannot fall below a guaranteed minimum amount.
The policy consists of two parts: the minimum and the excess amount created by the investment returns. Variable life insurance is only suitable for those with higher risk tolerance.
Current Assumption Whole Life (Cawl)
It is an interest-sensitive policy where the insurer's current investments are credited to cash values. Investment credits may be applied to specific groupings according to when they were issued. The policy may have a premium that is low initially and increases later or a premium that is high initially and reduces later. The initial premium is based on the insurer’s assumption.
Premiums can be adjusted annually or periodically. Favorable experience may allow the insured to choose a lower premium or a higher cash value, the opposite may be true.
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Universal Life Insurance
Universal life insurance has a flexible premium, adjustable death benefit, and unbundled life insurance contract. The policyholder is able to raise the policy death benefits. Policy cash values and pure insurance costs are unbundled. The cash value is determined by the current interest rates.
There are two options for universal life insurance:
Universal life with Option 1 death benefit - In option 1 the death benefit is simply the face amount of the policy.
Universal life with Option 2 - The policy has an increasing death benefit, which is the face amount of the policy with the addition of the cash value. Due to the higher death benefit of the policy, it puts more risk on the insurance company and therefore increases the mortality costs paid by the insured.
Universal life insurance is typically not suitable for an individual on a fixed income because the premium and level of protection may be adjusted up or down.
Variable Universal Life
Variable universal life insurance is a universal life product with an investment option for the cash value and no minimum guaranteed rate of return. In a variable universal life policy, the death benefits are not guaranteed. Cash values are also able to decline to zero, causing the policy to lapse unless additional premiums are made. Due to this, variable universal policies are more suitable for high-risk individuals and those with investment experience.
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Other Types of Life Insurance
First-to-die Life Insurance
This type of insurance coverage provides a death benefit when the first insured dies. First-To-Die life insurance may cost less than two separate policies for couples that are earning similar incomes. With this type, they can include an optional guaranteed insurability provision for the survivor. The inclusion of death benefit in the gross estate depends on the incident of the ownership. In a business application, this type may be cost-effective in contrast to purchasing multiple policies on the same face.
Survivorship/Second-to-die Life Insurance
This type of policy provides death benefits when the second, or last insured dies. Second-to-die life expectancy is usually higher than any other individual. Therefore, premiums are lower. Survivorship insurance is frequently used for estate planning when a spouse intends to make substantial use of the marital deduction.
Survivorship insurance policies are the most cost-effective because premiums are calculated with the combined life expectancies of the individuals. However, premiums may increase at the death of the first insured.
A credit life insurance policy is one that protects the lender and borrower from a financial loss in the event the borrower dies before completing the payment of the debt. The face amount of the policy is usually used for the balance of the loan. The terms provide payment to satisfy the debt in the event that the debtors die.
In most circumstances, credit life is usually not recommended as an appropriate option. Instead, an individual term life insurance policy may be a better alternative because of the high credit life premiums relative to the amount of coverage provided by credit life insurance.
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Get a Quote for Life Insurance Today
There are many different types of life insurance available to you. It’s important to understand how each one works, and which option would be the most suitable for your situation. Many insurance providers provide quotes online before taking you through the rest of the process. If you need assistance, be sure to reach out to an insurance professional or your financial planner. Ultimately, the most important thing is that you have peace of mind knowing that your family will be taken care of financially.