If you’ve read the first part of our two-part series called Life Insurance 101, you have probably already figured out that you could benefit from having life insurance. In this second part of the series, we explore the life insurance policy options and which are a good fit for you.
First, we look at some common features of life insurance policies, then we list some types available and what they offer.
Life Insurance Policy Features
Most life insurance policies operate in a similar manner: a premium is paid, coverage is provided as long as the said premium is paid, and once you die, a beneficiary receives a specific amount of money.
It’s beneficial to understand some frequently used terms in insurance policies.
● Beneficiaries. This is a person or persons designated by you to receive money from the insurance company upon your passing. You can specify how much or what percentage each person gets. Common beneficiaries include a spouse, children, grandchildren, or other blood relatives. However, some people choose to designate a friend, non-profit organization, or charity to receive the benefit instead of family members. It’s your policy, so you get to choose who gets what.
● Death benefit. When you die, the money paid to the person you have named in your insurance policy as your beneficiary is called a death benefit. This amount is promised to be paid by the insurance company that issues the policy. The death benefit is usually not subject to federal tax and is not considered taxable income when your beneficiary files taxes.
● Premium. Similar to a house mortgage, the premium is a monthly payment to keep the policy valid. The premium may be a fixed amount or it could be variable, meaning it can change from month to month depending on the type of policy you choose.
There are some lesser-known components of life insurance that are available for an additional fee. Not every company will offer these and some are restricted to those that qualify. Additional options are called riders and can include the following:
● Accelerated death benefit rider. People who have been diagnosed with an end-stage disease can apply for this rider. Instead of being paid to your beneficiary, that money becomes available to you while you are still alive in order to help pay for medical expenses and necessary treatments. The total death benefit paid to your beneficiary after your death is reduced.
● Long-term care rider. People who may require long-term care should think about applying for this rider. It allows you to dip into your policy benefits to pay for your long-term care needs.
● Waiver of premium. This add-on feature protects you by waiving your monthly premium if you become critically ill, disabled, or unable to work. The insurance company will maintain your policy rather than cancel it because of nonpayment of premiums.
Types of Life Insurance
Now that we have a basic understanding of some common terms, we look at the different life insurance policies available. Life insurance boils down to two foundational types: term and permanent.
Term Life Insurance
The name “term” is a clue as to the nature of this insurance. A term is a specific amount of time. Term life insurance may span 10 to 30 years of your life.
Term life insurance includes some specific attributes.
● It is commonly offered by employers as an employee benefit. This group life insurance usually offers minimal coverage. It normally is terminated if you leave your job or are let go.
● Your designated beneficiary will receive the death benefit if you die within the years that you have coverage. Your coverage ends when the term ends. At this point, you either buy a new policy or go without it.
● Term life insurance has no cash value. You receive nothing when it ends. You cannot borrow against it, and it does not earn interest.
● Monthly premiums are the same amount each month and are less expensive than those for permanent life insurance.
Permanent Life Insurance
Again, the name here is a clue for this type of insurance. Permanent life insurance coverage lasts for however long you live, as long as the premium is paid. The two main types of permanent life insurance are whole and universal.
Whole and universal life insurance have similarities which include:
● It has a cash value component. A portion of the premium that you pay grows with interest in a tax-deferred account.
● You can borrow against it. The cash value can pay your premium, loan yourself money, or fund your living expenses once you are retired.
● More expensive than term life insurance. Permanent life insurance comes with higher premiums than term life insurance.
So, what is the difference between whole and universal? The premiums and the guarantees.
Whole life insurance has a fixed amount you pay for the monthly premium. It also provides your beneficiaries with a fixed death benefit that is guaranteed.
Universal life insurance premiums are flexible. The amount can vary from month to month since you decide how much coverage you need depending on the season of your life. And you can adjust the death benefit up or down to suit your needs.
Final Thoughts
In this second part of our two-part Life Insurance 101 series, we’ve examined the life insurance options available to you. Providing for your family with the extra money they will need upon your passing can be achieved through either term or permanent life insurance. With some forethought and planning, you can secure the life insurance policy that’s right for you.