Life insurance is considered a cornerstone of financial planning by many financial professionals. It is designed to provide financial security to loved ones in the event of your demise.
When you purchase a life insurance policy, you essentially exchange premium payments for a death benefit that is given as a lump-sum payment to your beneficiaries.
Generally, there are two types of life insurance policies: term and permanent. Term life insurance offers coverage for a certain amount of time, while permanent life insurance provides coverage for the policyholder’s whole life. Although there are two primary types of coverage, various policies fall under the life insurance umbrella.
To better understand the types of coverage suitable for your goals and needs, here is a breakdown of several types of life insurance and who the policies are ideal for.
Types of Life Insurance
Term Life Insurance
Term life insurance protects policyholders for a set amount of time and pays a death benefit to beneficiaries if the insured person dies within that time frame. Term life insurance coverage usually ranges from one to 30 years. Typically, all payments and death benefits are fixed.
There are several reasons someone would want to select a term life insurance policy. One might be if there are specific expenses that need to be covered for a finite amount of time. For instance, if covering the years of a mortgage loan or college expenses for loved ones is a priority, term life insurance may make the most sense.
Another reason to consider term life insurance is if there isn’t a need for lifelong coverage. In that case, a term life insurance policy might be more affordable and meet specific life insurance needs for a particular amount of time.
Whole Life Insurance
Whole life insurance is the most common type of permanent life insurance that protects policyholders for the duration of their lives.
As long as premiums are paid, whole life insurance policies offer a guaranteed death benefit. Like most permanent life insurance policies, whole life insurance has a cash value component that can grow over the policy’s life.
When a policyholder pays the premiums, a portion goes toward the cash value component, helping it accumulate over time. Therefore, it can act as an emergency fund for the policyholder. It is important to note that this is considered a loan as interest will be accessed for these funds.
If there is a need for cash, the insured can take out a loan against the policy or withdraw funds. If a loan is unpaid at the time of death, it will lower the death benefit for beneficiaries.
Although the cash value component and lifelong coverage seem appealing, whole life insurance is unaffordable for many people. But some situations make these policies alluring.
A whole life insurance policy, for example, can be used to fund a trust and provide support to dependents upon the policyholder’s death.
A policy also could be used to pay estate taxes for the wealthy. For individuals who have estates that exceed the current estate tax exemption (IRS guideline for 2020), nearly $11.6 million , the policy can pay the estate taxes when the policyholder dies.
Other forms of permanent life insurance may meet these needs as well.
Universal Life Insurance
A universal life insurance policy typically provides more flexibility than a whole life insurance policy. With universal life insurance, it’s possible to increase the death benefit if the policyholder passes a medical exam. Also, the cash value component usually earns interest.
Once the cash value element of the policy accumulates enough cash, policyholders have the option to alter premium payments. This is useful if the insured party’s financial situation changes and they need money to pay their premiums. They can use part of the cash value to make payments.
If there is not enough cash in the account to cover the premium costs, however, the policy could lapse.
Like other permanent life insurance policies, universal life insurance might be worth considering if someone has a special-needs child who will require financial support after the parent’s death.
Or this policy might be worth taking a look at if someone has big savings goals and needs the interest of the cash value element and a life insurance policy. This example only makes sense if someone has maxed out other retirement savings options.
Variable Life Insurance
Variable life insurance combines a death benefit with a cash value element that policyholders can invest in stocks, bonds, and money market funds.
Because policyholders can have a broader selection of investments, the policy’s cash value may grow at a more rapid pace, but policyholders also take on more risk.
There’s a chance the cash value and death benefit can decrease if the investments don’t perform. Some policies may guarantee a minimum death benefit, even if the investments are not performing.
Also, premiums can fluctuate with the cash value of the policy. Depending on the performance of the investments in the cash value account, policyholders can use some of the proceeds to pay the premiums.
Conversely, if investments are not performing, policyholders may have to increase premium payment amounts to ensure that the policy’s cash value portion doesn’t fall below the minimum.
A variable life insurance policy might be the right choice for someone who wants a broader range of investment options for the policy’s cash value component.
While returns are not guaranteed, the greater range of investments may yield better long-term returns than a whole life insurance policy will.
Variable Universal Life Insurance
Variable universal life insurance is another type of a permanent life policy that combines the investment features of a variable life insurance policy with the ability to adjust death benefits and premium payments that come with a universal life insurance policy.
With a variable universal life insurance policy, policyholders can adjust premium payments depending on the accumulation of the policy’s cash value element.
If the cash value can cover the policy’s costs, the insured can skip a payment or reduce the payment amount. This feature is useful if policyholders are short on cash because of a financial emergency.
As with a variable life insurance policy, policyholders have a variety of investment options. The investments mimic financial markets, increasing or decreasing the policy’s value depending on the investments’ performance.
Also, variable universal life allows policyholders to make investment subaccounts without tax implications.
This type of policy is a good option for someone who is seeking a life insurance policy with maximum flexibility. If life insurance needs change over time, policyholders can increase or decrease coverage.
Guaranteed Issue Life Insurance
To qualify for most life insurance policies, some form of medical underwriting is required. Medical underwriting assesses information from exams, blood tests, and medical history, which determines the applicant’s health status.
This process helps policyholders pay premiums that coincide with their health status. Guaranteed issue life insurance doesn’t require the same level of medical underwriting.
This means that applicants may not have to take a medical exam to qualify. Less medical underwriting, though, means policies tend to be more expensive.
Additionally, until the policy is in force for a certain amount of time, beneficiaries may not receive the full benefit amount if the policyholder dies. This is known as a graded benefit.
In general, guaranteed issue life insurance policies are meant to pay for final expenses such as burial or funeral costs. They have small death benefits and are designed for those in poor health or who have been denied coverage, so these policies are considered a last resort.
Determining the Right Fit
A person’s age, health, budget, and particular needs play into choosing from different types of life insurance.
If you need life insurance only for a certain amount of time, you may want to select a term life insurance policy with a term to match your needs. Covering a child’s college and postgraduate years is a common scenario. Another is mortgage protection for a partner.
A term life insurance policy may be a good fit for someone who has a limited budget but needs a substantial amount of coverage. Since term policies have a specific coverage window, they are the more affordable option.
For someone who needs coverage for life and wants a cash accumulation feature, a permanent contract such as whole life insurance might be worth considering.
Not only will this policy stay in place for life (as long as the premiums are paid), but the cash value element allows use of the funds to pay premiums or any other purpose.
Whole life insurance is more expensive than term life insurance, but the premium remains the same for the insured’s life. Renewal of a term policy may trigger a premium increase.
Keep in mind that no matter what type of policy is right for you, it’s best to apply when you’re young and healthy so you can receive the best rate available.
Taking the Next Step
If you decide that a term policy makes the most sense for your situation, you can apply for a policy in a matter of minutes online.
Ladder Life™ term life insurance policy made available through Ladder Insurance Services, LLC (Ladder) and underwritten by Fidelity Security Life Insurance Company, Kansas City, MO. Product availability and features may vary by state. Not available in New York. The California license number for Ladder is OK22568. Policy Form No. ICC17-1069, M01069, Policy No. TL-146.
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