Types of life insurance
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There are many types of life insurance, and while choosing the right policy should be as easy as pie, it can be challenging to wrap your head around. Here’s the low-down on different types of life insurance.
Term life insurance
For many people, term life insurance is the type of life insurance that best meets their needs. It offers the lowest initial price, so it’s the ideal choice if you’re on a budget or have temporary needs. But how does it work? A term policy provides coverage at a fixed cost for a defined number of years. If you choose 20 years, you have selected a ‘term’ of 20 years for your policy. This option would then provide a lump sum payment (‘death benefit’) to your designated beneficiary (usually a family member) if you were to die while the policy is active.
There are different types of term life insurance plans. Typical life insurance companies offer 10, 15, 20, or 30-year term options. Legal & General America has more choices than any other national carrier with the addition of 25, 35, and 40-year terms. A 40-year term policy will initially cost you more than a 10-year term policy because it will cover you in your later years. Of course, the trade-off with the 10-year policy is that while it will cost less now, as you age and your health changes, getting a new policy in 10 years could cost significantly more.
You might be thinking, a 40-year contract? That’s a long time. Won’t my insurance needs change over time? Perhaps your needs will change, which is why it is be a good idea to plan for anticipated changes.
Customize with term riders
With a policy from Legal & General America, you can customize your amount of term life insurance to suit your future goals with the use of term riders. This type of additional coverage allows a buyer to get temporary cover for a desired amount of time, such as adding a 20-year rider to cover college costs, on top of a base plan of 40 years to protect your income. You might consider a Children’s Life Insurance Rider to provide coverage for any children you have, or an Accelerated Death Benefit Rider, which advances a portion of the death benefit to cover health costs if the insured individual is diagnosed with a terminal illness. The accelerated death benefit rider is a free benefit provided by Legal & General America to help make caring for loved ones easier during a difficult time.
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Types of permanent insurance
In contrast with term life insurance, permanent insurance provides permanent (“lifetime”) coverage. There are several sub-types, or options, that fall under this type of life insurance of which offer guaranteed premiums, flexible payments, and/or exposure to equity markets.
While permanent life insurance is the most popular type of life insurance plan, the trade-off for lifetime coverage is that permanent insurance costs significantly more than term insurance. For some people, this means that an affordable permanent insurance policy will have a lower payout compared to a term policy with the same premium. The choice really comes down to what your needs are.
The rules for permanent life policies can vary from one product to the next, and the devil is always in the details, as they say, so it’s worth reading the small print and reviewing your situation with a financial advisor before purchasing permanent insurance. Here are some general guides on the types of permanent life insurance available.
Whole life insurance
Whole life coverage is the most common form of life insurance and what many people think of when they hear “permanent life insurance.” Whole life provides a policyholder with lifelong coverage that includes a guaranteed ‘cash value’ (think trade-in value) component allowing you to build up savings over time.
With a cash value, the policyholder may take out loans against the cash value of their permanent policy or give up (‘surrender’) the policy in exchange for some portion of the cash value. The cash value on a whole life policy grows tax-free, and withdrawals or loans can be tax-free too. To be sure, you’ll want to consult a tax professional when taking out or exchanging a value higher than what you’ve invested. It is always a good idea to speak to your tax advisor and financial planner to see if a whole life policy works for you as an option.
If you like predictability, then you may like that whole life guarantees fixed premium payments and no changes in the death benefit.
Universal life insurance
Universal life insurance is a type of permanent life insurance that allows you to build cash value, withdraw funds, and may have basic investment options. What is unique about this type of insurance is that it offers flexible premiums, giving the policy owner some ability to vary premium payments as income changes. This is certainly something to consider when planning for retirement and anticipated shifts in future income.
Universal life insurance contains a savings component, with different product types offering different ways to invest the money. With traditional universal life, cash value earnings grow based on a fixed rate. Variable universal life insurance refers to a policy where your cash value can be invested in equities at the discretion of the policy owner and fluctuates per market conditions. An indexed universal life policy allows a policy owner to have exposure to the stock market, but with some protection against market downturns.
Final expense insurance
It might be a lesser-known type of life insurance, but for many, final expense insurance is worth considering. Sometimes known as burial insurance, this type of life insurance plan covers some of the costs that your loved ones would otherwise have to pay after your death. This may include medical bills, funeral costs, and even trips to scatter your ashes. You may not need final expense insurance if you already have permanent life insurance in place, but if your term insurance has expired, final expense insurance can help your family meet those extra costs at the end of your life. While you will pay higher premiums compared to your term insurance policy for the same amount of coverage, some policies include guaranteed acceptance if you’re aged 50 to 80, no medical exam, and no increase in your premiums, even if your health changes.
Additions to permanent life insurance
Some policies include optional riders or additional benefits that you may want to be aware of such as
- Accelerated Death Benefit Rider
If you have a qualifying terminal illness, an Accelerated Death Benefit Rider on your policy gives you an option to receive a portion of your death benefit to help with the costs of end of life health care. - Accidental Death and Dismemberment Insurance
As the name implies, AD&D insurance pays the beneficiary in the event of a covered and unintentional death of the insured. Typically this coverage is offered as a rider on term insurance policies. - Critical Illness Insurance
In addition to a permanent policy, critical illness coverage is where the insured receives a cash payout to help with expenses incurred for the treatment of health events, such as cancer or a heart attack.
So, which is the best type of life insurance? The short answer is that It depends on your needs and your financial plans. Whichever type you choose, take a moment to consider your short- and long-term finances and family circumstances. Once you’re ready, we can help you become fully protected in no time.