This article will go over the different types of Life Insurance coverage so you know what is available and have a better idea what fits your needs.
All life insurance can be categorized as either term plan or permanent coverage. There are different types of term and different types of permanent. Let’s start with term.
Term insurance is the most common type of life insurance on the market and is very popular with families that have dependents or a mortgage. The reason for this is because term insurance allows the lowest possible price for the most amount of coverage during a determined length of time. The coverage has a fixed premium for a set number of years chosen. If the insured is still alive after the term length ends the policy becomes annually renewable at increasing rates. At which time the policy owner typically will either cancel the coverage or convert the plan to a permanent plan at a higher rate. These plans are popular for those with young kids, a mortgage, a business loan, or a liability for a fixed number of years. If the insured is still alive after those years are over than losing coverage is not a great concern as the liability is no longer present (kids, mortgage, etc). It is important to note the term insurance is designed to payout in the instance of premature death and it is NOT designed to last to life expectancy. For this reason term insurance is not an estate planning tool but back-up in case there an unforeseen death.
There are many term plans available on the market and the younger an applicant is the longer the length of term that can be purchased. The most common choice is a 20 year term; long enough to raise kids and to pay down most of a mortgage. But there is also a 10,15,25,30, 35 and even a 40 year term available. But as we age the choices for term insurance diminish. By the time someone is 75 for example a 20yr term is no longer available. See the graphic below for age & product. To see your rate for term insurance click here
Whole Life insurance is a permanent plan that is designed to last an insured’s entire lifetime. It is considerably more pricey than term but many people like whole life because as long as you pay the premium the plan will not expire prior to death. Whole life also builds a cash saving inside the contract. These dollars can be used to pay the premium later on or subsides a retirement plan later on an income-tax free basis if set up correctly. Whole life was once the bedrock of the life Insurance Industry and is still very popular however the cash-value or savings inside the contract has been the subject of much debate in recent years. Smaller whole life plans are often referred to as burial insurance or final expense plans. These $5-$25,000 plans can be easier to qualify for with relaxed requirements.
GUARANTEED UNIVERSAL LIFE
If looking for a larger death benefit than $25,000, but a plan that will still last to life expectancy with a fixed level premium, than Guaranteed Universal Life is the ticket. These plans offer the lowest price for a level death benefit that will last all the way to life expectancy or even beyond. What is the catch? There is no cash-value like a whole life policy would offer and there can be more underwriting requirement to qualify needed like a medical exam. Guaranteed Universal Life is popular for estate planning beyond paying for a burial.
INDEXED UNIVERSAL LIFE
Indexed Universal Life has been all the rage in recent years. These plans have the potential to offer higher cash-value accumulation than a traditional whole life plan however this has been a hotly debated topic in recent years. Indexed Universal Life or IUL is a plan where the insured picks a market index, such as the S&P 500, to peg or “index” the cash value build inside the contract. If for example the S&P goes up 10% then the cash value in the plan maybe credited 10%. The cost of the insurance however still need to be deducted and their are caps, spreads, and crediting methods that also come into play but that is the basic idea behind indexing. The policy owner is NOT investing in the market but using the market to peg the cash-value growth inside the plan.
These plans can be designed in a variety of ways. Another future post will do a deeper-dive on IUL plans but for now know that IUL plans are not built for a lower premiums but a product that offers higher possible cash-value.
ACCIDENT ONLY PLANS
These plans have probably been one of the biggest sources of confusion for seniors. Accident-only plans, as the name implies, pay out ONLY if an insured pass by accident. This is also why these plans are so low-priced since most people are likely NOT going to pass away from an accident but from natural cause. Most accident plans end by age 80 although a few will go longer. Regardless of how long the plan lasts it is important to know that these plans are not a reliable final expense, burial or whole life insurance policy. Credit unions and banks like to provide these plans to their members for “free” or a low-cost, however many seem unaware of the likelyhood of a payout. Do not confuse an accident-only plan with a burial or final expense insurance.
AGE vs PRODUCT