The Life Insurance Industry has evolved over its lifetime to develop products looking to suit people in all situations. To go into depth about every single form of life insurance would be a large task that would likely result in an over simplification of what is available to you. For the purposes of this article, we will look into the main forms of life insurance available and how they are designed to serve you.
The first thing to understand is that the main function of life insurance is to provide a financial benefit to a group or individual in the event of someone’s passing. While life insurance can be structured to provide living benefits and can be used creatively within portfolios to lower your tax burden, these strategies are only for the more experienced planners. For most, it should be explored as a way of providing a benefit to the people that will suffer most from the loss of the insured’s life.
Term Insurance
Term insurance is the least expensive and one of the most popular forms of life insurance. It gets its name from the nature of the insurance being designed to be in place for a certain period of time. Popular lengths for term insurance include 10, 20, and 30 years. Should the death of the insured party occur while this insurance is in place, the beneficiary will be paid the amount of insurance decided upon.
This type of insurance is guaranteed to be in place as long as the owner of the policy is up to date on paying the premiums. This may even extend further than the number of years the policy is designed for, but the policy will no longer have a guaranteed level premium beyond the initially agreed upon number of years. For example, in many cases, you could keep a 20-year term policy in force beyond the 20 year mark. Although, chances are the premium payments after year 20 will make this option cost prohibitive.
Permanent Insurance
Permanent insurance is a more expensive form of insurance because it is designed not to expire. This can be beneficial because – as long as you make your scheduled premium payments – you know there will be a death benefit available for beneficiaries at the time of the insured’s death. This is not always the case for term insurance where the term might expire before the time of death. Attempting to purchase insurance in the later years of life will likely result in a rejection or very high premiums. This can make purchasing permanent insurance while young and healthy an attractive idea since it will guarantee the lowest possible lifetime premium.
The other benefit to permanent insurance is the accumulating cash value. With premium payments being contributed towards the cost of insurance, the death benefit, and the cash value of the policy, the cash value can take some time to build up. Once it does, it can be an effective tool to use for creative planning. It does not grow as quickly as money put into investments could, but it does receive dividends from the issuing company that allows it to grow at a greater rate than a standard bank account. This cash value could be used to take loans from in the future or be taken as a lump sum.
Universal Insurance
This is a more flexible kind of insurance that could be attractive for somebody who has uncertain or fluctuating income. A universal insurance policy allows you to adjust different options around your policy while it is still in force. With a traditional policy, if you wanted to make changes to the death benefit, or other features of the policy itself, you would likely have to apply for a new policy all together. This would put you at a disadvantage because you would be at an older age than the original policy and would be essentially guaranteed to have a higher premium on the new policy.
Most Universal Insurance policies also offer a range of premium options that you can pay to keep the policy in force. If you find yourself in a time where your income is decreased, you can lower your premium payments for a period of time to keep your policy in force during this period. The dangerous side of this is that it can be easy to forget to increase your premium payments down the line when income is steady again. If you only contribute minimum payments to your policy, it could run the risk of lapsing in the future even though you were putting money into it.
Variable Insurance
This kind of insurance provides you a way to have your life insurance doing more work for you through investment strategies. A variable insurance policy gives you options of accounts that you can have your money attached to for growth possibilities. For this reason, variable life insurance generally tends to be a more expensive kind of policy as premiums will also be contributed towards administrative fees and fund management for the plan’s investments.
Variable Insurance can be attractive since it doing more work than a traditional policy, but it can also be risky because the value of the policy will go down if the market is not performing well. This kind of policy also has a limited number of investments available in it and does not guarantee that those investments will suit what you are looking for. This makes variable insurance something that should only be considered by people who truly understand investing so they will be able to make the best choice for themselves.
Other Forms of Life Insurance
There are plenty of other kinds of life insurance including guaranteed issue, variable universal insurance, and final expense insurance. If you are thinking about life insurance but feel your situation makes it too restrictive, you should still explore your options. But, if you are young and in good health, it is likely that one of the options above are going to be where you land. Be sure to consult with a trusted advisor and do your best to understand the nuances that exist between policies being issued by competing companies. Small differences in the wording of the contract can make dramatic changes to how it functions and these changes will impact the people that matter to you most.
