When most people think about buying life insurance, they don’t realize how many different options there are to choose from. Choosing the best policy requires understanding each option, and then knowing if that options is right for you and your family. Types of life insurance that a person or family might see while shopping will include term life insurance, whole life insurance, and simplified issue, among others.
The main differences in the policies concern the amount of money paid for the benefit, the length of time the insured is covered, and the application process required to gain approval of the policy. Depending on a person’s circumstances, one type of policy might be more beneficial than another. The first step to choosing a policy requires understanding each type’s differences.
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Term Life Insurance
Term life insurance is a policy purchased for a specific length of time and a payout for that policy is guaranteed during the length of the purchased term. Some of the common terms that people purchase are 30, 20, and 10 year terms. When the term is over, the policy’s coverage is no longer guaranteed, and another policy must be purchased. Getting cheap term life insurance is the most economical option for obtaining a substantial payment in the event of the insured person’s death.
Term life insurance was the only type of insurance many years ago before insurance companies began providing different types of benefits. The reason why a person will usually obtain term life insurance is for income replacement needs for individuals. Term life insurance offers security to the beneficiaries of the insured upon his or her death.
Whole Life Insurance
This type of policy is a permanent addition to a person’s life and generally payments on the premium are required each year of an active policy. These policies tend to mature at the age of 95 and cash value is built upon the policy each year that premiums are paid. One interesting facet of this type of policy is that it builds value or equity over time and may be cashed out early. The equity built within the policy is used over time to maintain the policy by the insurance company.
Within the heading of whole life insurance, there are a number of types available with some states offering up to six slightly different types of whole life insurance. Each state tends to classify these various types of term life insurance a little differently. It important to look up whole life insurance policies for a specific state before deciding which type to buy.
Sometimes a whole life policy is called a “permanent life policy.” Other terms describing whole life insurance that a person might hear while researching this type of policy include:
- Current assumption whole life
- Equity-indexed universal life
- Indeterminate premium whole life
- Limited payment whole life
- Participating whole life
In addition, another type of whole life policies includes guaranteed universal life. Many people today choose guaranteed universal life because the death benefit is guaranteed. The only caveat is that these policies don’t accumulate any cash value over time. The reason people choose these policies is that they do necessarily cash out at 95, which means the insured may spend his whole life with coverage without the policy expiring.
The latest craze in life insurance policies is getting policies that don’t require a medical exam. In the past, you could only get a small policy, say $25,000, but now there are carriers that will offer up to $350,000 of coverage all while avoiding the medical exam. Just because you can get life insurance without a physical, doesn’t always mean you should. In certain situations they can make sense, but they will all typically cost more than your traditional underwritten term policy.
A few different policy options exist for individuals who have reason to avoid a medical exam and those policy options include:
1. Simplified Issue
This type of life insurance allows an individual to apply for the benefit without the requirement of a medical exam. All that is required during the interview for a simplified issue policy is a series of questions about a person’s medical history. This option allows for swift and simple way to obtain health insurance, and may be the way to go for some people who aren’t in optimum health.
For individuals who are otherwise healthy and who have a clean health history, standard life insurance might be the way to go as it will usually be a little less expensive in cases where someone is in good health.
2. Guaranteed Issue (Graded Death Benefit)
Guaranteed issue policies are another type of policy that does require a health exam to obtain, and this type of policy often exists so as to provide individuals with preexisting health problems a way to obtain insurance and not be denied. Not every state requires insurance companies to provide this type of insurance to individuals, so it not available everywhere.
Graded Death Benefit means that the insurance company will not pay out the full benefit in the first couple years of the policy being issued (usually 2-3). These policies are traditionally used for individuals with severe health issues and are looking for something to cover final expenses for burial.
3. Hybrid Policies
In the past, many traditional life insurance policies would only offer a finite amount of funds that would be available for care such as home care assistance or nursing home fees, and when that money was drained from the policy, no more funds were available for care. This could cause problems for someone needing active health care for a number of years.
To accommodate the many seniors wanting life insurance decided not to buy for fear of running out of funds to pay for late-in-life care, the insurance industry created an addition to the average long term care health insurance policy called the “return of premium rider.” This meant that if the long term care policy was used, part of the premiums paid on the policy would revert to the insured. As with any other special addendum to a policy, this option would come with a higher cost overall.
Sometimes called “linked policies,” these hybrid policies would offer the benefit of an annuity while also offering long term care funding. This means that a person is covered whether they use the long term care benefits or whether the benefits pass on to their beneficiaries at death.
Life Insurance Does Not Have to be Complex
Life insurance tends to seem incredibly complex due to how many different options there are and because of the different types of policies available within each type. It not just a matter of understanding permanent life insurance versus term life insurance, but understanding all the options within those major categories.