Common types of life insurance policies, life Insurance can be defined as a contract between an insurance policy holder and an insurance company, where the insurer promises to pay a sum of money in exchange for a premium, upon the death of an insured person or after a set period.
Life insurance is designed to reassure you that your defendants, such as your children or a partner, will be financially looked after in the event of your death. There are several things to think about when buying it, such as the type of policy you want, when you need it and how to buy it.
The amount of life insurance you’ll need depends on your finances and what you want the death benefit to cover. If you are only wanting to provide for end of life expenses, you’ll likely need a lower death benefit than someone looking to provide income for their family members or leave a financial gift. To determine how much coverage you need, you can use a life insurance calculator and then discuss the results with a licensed agent.
Talking about what type of life insurance is best for you? That depends on a variety of factors, including how long you need coverage for, how much you want to pay and whether you’re looking for a life insurance policy that builds cash value over time.
Life insurance provides cash to your dependents. when someone die. The money replaces the income you provided and can be used for anything funeral expenses, living expenses, college tuition, mortgage payments, and even everyday bills and expenses. This benefit protects your family’s financial health.
8 Common Types of Life Insurance Policies
There are different common types of life insurance policies available, and every types of life insurance policies are ideals, it shouldn’t be confusing to know which one is right for you. This guide has put together the eight most common types of life insurance policies. Which includes:
- Group life insurance.
- Universal life insurance.
- Variable life insurance.
- Indexed universal life insurance.
- Simplified issue life insurance.
- Guaranteed issue life insurance.
- Term life insurance.
- Whole life insurance.
1. Group life insurance
Group life insurance is one of the common types of life insurance policies in which a single contract covers an entire group of people. Typically, the policy owner is an employer or an entity such as a labor organization, and the policy covers the employees or members of the group.
Group life insurance is often provided as part of a complete employee benefit package. In most cases, the cost of group coverage is far less than what the employees or members would pay for a similar amount of individual protection. So if you are offered group life insurance through your employer or another group, you should usually take it, especially if you have no other life insurance or if your personal coverage is inadequate.
All of those who are covered typically receive a certificate of insurance that serves as proof of insurance but is not actually the insurance policy. As with other types of life insurance, group life insurance allows you to choose your beneficiary.
2. Universal life insurance
Universal life insurance provides flexibility. If seeking a flexible way to help protect your loved ones and build tax deferred cash value, the Universal Life policy is what you need. While this flexible permanent protection is ideal for those potentially seeking to adjust coverage and premiums to meet changing needs, it can be structured as a Survivorship or Joint policy.
A typical benefit of Universal Life insurance includes:
- Helps provide for a family’s loss of income, mortgage costs, and educational needs
- Access to cash value (“living benefits”) for life’s opportunities
- Procurement for estate, special needs, and business planning
3. Variable life insurance
Variable life insurance is another interesting common types of life insurance policies with a cash-value component that is invested, typically in mutual funds. The cash value accrual depends on the performance of these funds; you could earn or lose cash value depending on how the funds perform. While variable life insurance isn’t likely to be a good fit for average consumers, it may be a good choice for those looking for coverage with an investment option.
Variable life insurance includes two components: a life insurance benefit and a cash value account that is invested in various funds, usually mutual funds. The money from your insurance premium is used in a few ways.
First, the insurance company keeps a portion of the money for account maintenance and fees and puts some money toward the death benefit. The rest of the money goes toward your policy’s cash value, which, in a variable life policy, is essentially an investment account. As the policyholder, you can choose how that money is invested.
The greatest risk in a variable life insurance policy is the risk of the investments. The insurance company doesn’t guarantee any rate of return and doesn’t offer protection for investment losses. Like any investment, the cash value component of a variable life insurance policy comes with risk. If you use your cash value to pay your premium, you could also risk losing coverage if your cash value is insufficient to handle the cost of the policy.
4. Indexed universal life insurance
Indexed universal life insurance is a type of permanent life insurance, which means it has a cash value component in addition to a death benefit. The money in your cash value account can earn interest based on a stock market index chosen by your insurer. Funds don’t earn a fixed rate of interest but typically come with an interest rate guarantee.
If you’re looking for coverage that offers the flexibility of universal life insurance and a cash value account with higher growth potential, you might consider indexed universal life insurance. Indexed universal life gives you a chance to experience some of the upsides of the stock market while limiting risk.
Indexed universal life insurance works similarly to universal life. You pay a premium in exchange for lifelong coverage and can use the cash value account to build an investment. Part of your premium payment goes toward the cost of insurance (covering your death benefit) and other fees, then the rest is added to your cash account.
5. Simplified issue life insurance
Simplified issue insurance is a life insurance policy you can be approved for with minimal health questions. This type of insurance is typically geared towards people who need to obtain life insurance right away and/or those who don’t wish to submit to a medical exam.
A simplified issue insurance policy is geared towards providing life insurance quickly. Most people who apply for a simplified issue policy can expect to have insurance in force upon acceptance of their application.
Instead of a medical examination, a short health questionnaire must be answered, allowing the insurance company to complete a modified risk assessment and set a premium and death benefit.
Some insurance carriers provide simplified issue life as either a term life or a permanent life policy. You may or may not be allowed to add riders to your policy to expand or enhance coverage or death benefits.
6. Guaranteed issue insurance
Guaranteed issue insurance is a type of life insurance policy that is typically geared toward people with health conditions that prevent them from obtaining other forms of life insurance. Also known as guaranteed acceptance life insurance, guaranteed issue is typically a type of permanent life insurance.
Guaranteed issue and simplified issue life insurance are both types of burial insurance. However, guaranteed issue insurance is better for seniors or people who don’t qualify for any other type of life insurance because almost no one is turned down.
Simplified issue life insurance is best for seniors or people who can’t qualify for a traditional life insurance policy, but who are only a moderate health risk. A detailed medical questionnaire is required and slightly higher coverage amounts are available.
Guaranteed issue life insurance works differently than other types of life insurance. Here’s where it differs most:
Only a basic application is required no medical exam, health questions, or waiting period.
Nearly all applicants are approved.
Unlike whole life insurance, guaranteed issue doesn’t always come with a cash value.
The maximum amount payable to your beneficiary when you die is usually $25,000.
Some guaranteed issue life insurance policies require you to hold the policy for at least two years before it will pay the full death benefit.
7. Term life insurance
Term life insurance is a type of life insurance policy that has a specified end date, like 10 to 20 years from the start date. The death benefit will only be paid out if the policyholder dies during the chosen term. The death benefit is the amount of money that will be paid to the beneficiary when the policyholder passes away.
The most common type of death benefit for a term policy is a level term policy, which means that the value of the death benefit stays the same for the entire time your policy is active. The benefit can also be decreasing, meaning it shrinks over time, typically in one-year increments
Term life insurance is the most common form of group life insurance. Group term life is typically provided in the form of yearly renewable term insurance. When group term insurance is provided through your employer, the employer usually pays for most (and in some cases all) of the premiums. The amount of your coverage is typically equal to one or two times your annual salary.
Term life policies can be bought either individually or through a group life insurance plan available through an employer, civic, or religious organization.
8. Whole life insurance
If you’re looking to treat your life insurance policy as a cash asset, you might be in the market for a whole life insurance policy. Along with providing a guaranteed payout to your loved ones when you die, these policies build cash value over time at a set interest rate.
A whole life policy can serve as a source of emergency funds for you if something goes wrong, or you may be able to take out a loan against the policy. That’s because a portion of each premium payment you make is funneled into a savings component of the policy called the “cash value.”
Whole life insurance is a type of permanent life insurance, which means the insured person is covered for the duration of their life as long as premiums are paid on time.
The cost of a whole life insurance policy depends on several factors, including how much coverage you buy and other things.
When it comes to paying your premiums, you’ll typically be able to make a fixed annual payment for a whole life insurance policy. Some life insurance companies may also offer the option to pay monthly, quarterly or twice a year. Be aware, however, that paying premiums more frequently than once per year may incur additional fees.
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