A life insurance policy, though necessary for various reasons, is most likely not the first purchase anyone thinks to make. When they do, the options are so overwhelming, making the process dreadful, but it doesn’t have to be. A good life insurance agency can go through all of your options in great depth, but it is also good to be prepared.
To start, before you begin receiving any life insurance quotes, it is best to familiarize yourself with the types of policies out there to have a firm grasp on where to start, or what you may be looking for in the long run. While you read further, make some notes on what type of policy appeals to you the most as each has pros and cons.
The most straightforward place to start is by making a list of all of the types of life insurance plan options before diving further into their definitions:
Term life insurance is one of the simplest forms of life insurance available. This benefit is defined as the holder, or you, paying the monthly policy payment, called premiums, on a set overall plan amount that will payout to your beneficiary at the time of death. This insurance policy does have an expiration date, usually thirty years from the time it is written, which means that it will only pay the plan amount should you die before then.
On the other hand, whole life is a policy that lasts longer because it doesn’t expire. Not only does this type of policy work as a death benefit at the time of death, but it also has a cash value. Though whole life insurance will last as long as payments are made on the policy, the price can be up to fifteen times higher than those on a term life policy.
Though universal life insurance can be mistaken for whole life in that it will not expire so long as payments are made, and it also has a cash value and death benefit, there is one significant difference. A holder of a universal life insurance policy can change the cash value or the death benefit amount without having to go through the process of getting a new policy.
With this policy, you can even use your cash value to pay on the premium amounts. The amount of the cash value has an interest rate that is determined by the current market, but should you have enough money accrued in it, the policy will allow you to pay the premium with that cash value, forgoing monthly payments. This ability to change the amounts of your policy as well as using the cash value to pay on it makes it appealing in case your financial status changes enough to make payments difficult.
Again, this policy is similar to the whole life insurance policy in that they both have a cash value. The cash value, however, has different functions. In a regular whole life policy, the cash value works like a savings account, which accrues interest over time at a guaranteed minimum rate of interest. A variable life insurance policy has a cash value that is closely aligned with investing, which means that the amount of interest is determined on the market. Overall, though the growth may be higher than in a whole life policy, it is riskier because it’s similar to investing in the stock market.
This policy takes the best of both policies such that it allows you to adjust your premium and death benefit amounts while also investing your cash value for a higher return. In most cases, this policy ends up becoming more complicated than most people would need, and it is better to look at something more manageable such as term life.
Due to the name this type of policy may be appealing for most people looking for a life insurance plan. The reason that this policy is considered simplified is due to the fact that it does not require a medical exam unlike other policies. When applying for this policy, one simply has to fill out a health questionnaire that companies use to determine whether they will accept you for the policy.
For individuals who are young, healthy, and in a hurry, this may be a great option. There is no reason to go through medical testing, when you may be accepted by simply filling out a form, but for those with health issues it may not work. Companies determine eligibility based on how risky the holder will be, and those with health issues may find themselves denied.
The bigger drawback to this policy is the amount that it will end up costing in the long run. For example, a term life insurance policy may be more cost beneficial because if the medical exam determines you are someone in perfect health and you are young, the company assumes you will outlive the expiration date. If you choose to go with this policy, the premium may be larger to compensate for the uncertainty of having skipped the medical exam.
This policy is similar to the simplified issue policy, but takes it a step further in that the questionnaire is not necessary as well. For this reason, this type of policy is popular with older people as they will not be declined or have to pay higher amounts in a different insurance policy. The amount will still be higher than it would be for a healthy person in a term policy, but the policy is guaranteed and may at least help with some of the burden on the family should the holder of the policy pass away.
As the name suggests, this is a policy that will cover anything that is associated with the last expense of someone who is passing away making it a very popular option amongst the older generation. The drawback with this insurance is the higher premium being paid for a relatively low amount of coverage.
This is a benefit that is provided by an employer, most of the time at no extra cost. Though this may not be specifically categorized as a life insurance policy, it is placed here on the list to make you aware that you may need more coverage than your employer provides. There is no reason not to take such a policy if it is provided at no extra cost, but you may want to look into purchasing further coverage.