How life insurance works and how it offers coverage is very simple. The practice has always been to provide those who depend on you with financial protection if something happens to you, the policy owner. This seems to be simple to navigate, were it not for the different types and subtypes of policies.
Finding the life insurance policy that is best for you can be a confusing process if you are not familiar with the basics. Insurance companies use factors such as the life of the policy, cost, and present effective value, to categorize different life policies. At this point, you may not know what those terms refer to. This article is not only a dictionary of what life insurance means, but also a guide to buying the policy that is best for you.
What are the Basics of Life insurance?
Before we start with the specifics of life insurance, let’s start with the basics. These would be what life insurance includes in all policies.
All insurances include:
- Death Benefit- The amount paid by life insurance is called a death benefit, which is paid when the policy owner dies.
- Beneficiaries- These are the people on the insurance who will receive the death benefit. Everything can go to one person, or be divided among several people.
- Term- This life insurance phrase refers to the time the policy will be active and provides coverage. Some policies can last several decades, while others can last a lifetime.
- Premiums- A premium, or fee, is the amount the policyholder pays each month to maintain coverage. All types of insurance such as vehicle and home insurance have their own premiums.
- Present Cash Value- life insurance may have an investment component that may increase over time based on the type of coverage. It can be access or borrow at any time. Life insurance that is not permanent is usually exclude from actual effective value.
What are the two Types of Life insurance?
This article can be describe as an ice pick, where general details are the point, and the lower we go, the larger and more complex. Right now, we’re at the point of two broad categories into which life insurance falls.
These are the two categories into which life insurance falls:
- Term Life Insurance- To put it simply, a life policy is consider temporary when it does not last a lifetime. These policies remain active for decades. When the policy expires, a new one can be purchase.
- Permanent Life insurance- This is sometimes refer to as a whole life policy. Literally, life insurance is permanent when it comes to expiration. The policy expires when the owner of the policy dies.
What are the Differences between Temporary Life Insurance and Whole Life insurance?
The key differences between term life insurance and whole life insurance go beyond duration. More differences exist in actual effective values and monthly premiums. Naturally, term life insurance loses its current effective value when it expires, while whole life insurance remains constant until paid off. The first whole insurances are more expensive than the temporary ones. But for many, the money and time is worth it in the end. The present cash value of whole life insurance can also serve as an investment, accruing interest over time. The exact details depend on the type of policy you choose.
What are the Specific Types of Life Insurance Policies?
Temporary and permanent are the basic categories in which life insurance is categorized. At this point, we move under point to learn the specific names of the policies that are so define.
The Specific Type of Common Life insurance:
- Basic Term Life Insurance- A basic term policy would look exactly like we discussed in the previous sections- the cheapest way to have life insurance for a period of time. The life of the policy will vary from one year to three decades.
- Basic Whole Life Insurance- A whole life insurance policy that lasts until the policy owner dies, accrues current cash value with interest, and remains constant in premiums. Naturally, it is more expensive.
- Universal Life Insurance – A general whole life insurance policy comes in two sizes – indexed and guaranteed. Life insurance that is guaranteed ensures that the death benefit will be received without any change in premiums. Index life insurance matches the current effective value with the stock market.
- Variable Life Insurance- Variable policies are permanent, which allows flexibility with the death benefit. Variable life insurance also has the option to adjust premiums. At the same time, the two types of life insurance are coupled with dumping and mutual fund accounts of the policy owner.
- Simplified Issue Life Insurance- Underwriters refer to the insurance company to look at the risks of approving a life policy. They can do this with a medical exam or questionnaires. A simplified issue policy is a policy that does not require a medical exam, and can be temporary or permanent.
- Guaranteed Issue Life Insurance- Another policy with subscriber process. But, a medical questionnaire or examination is not necessary. It is impossible to be declined since it is guaranteed, making it a good option for the elderly or those with medical conditions. But, the coverage is low for the price. This type of life insurance can be temporary or permanent.
- Group Life Insurance- Employees sometimes offer group life insurance for their employees which can be temporary or permanent, but is usually temporary. Coverage has been basic for this group. The premiums have been higher because they are based on the entire group.
- Mortgage Life Insurance- Life insurance covers the mortgage in case the policy owner dies. This policy pays the bank directly instead of the beneficiaries. They can be temporary or permanent.
- Credit Life Insurance- Life insurance that covers a loan. This policy covers the loan in case the owner of the policy dies.
- Accidental Death and Dismemberment Life Insurance- This type of life insurance, either permanent or temporary, pays when the policyholder is kill or loses a limb in a car accident.
- Joint Life Insurance- This life insurance, either temporary or permanent, covers two owners of the policy at the same time. Payment occurs when one or both owners pass away. For this reason, this policy is not popular.
What Does It Mean When a Life Insurance is Indexed or Guaranteed?
From that last section, you get an idea of everything that has to do with life insurance. Up to this point, you have probably realize that the phrases “temporary” and “permanent” are used to describe the life of the policy. When life insurance is index or guarantee, the premiums and actual cash value vary opposite to the life of the policy. We’ve discuss guarantee and index life insurance in previous sections, but here’s more detail information.
Universal life insurance is the only type of policy that can be guarantee or index. When an agent refers to guaranteed or indexed policies, they are commonly talking about a universal policy. A guaranteed universal life insurance means that the current effective value will always be guarantee and will not change until it is pay off. Indexed universal life means that the actual effective value increases due to a fee. If the policy owner is looking for more freedom with their present cash value, they can purchase universal life insurance.