Life can be unpredictable. Life insurance exists to remove some of the risk of the unpredictability of life and death. By purchasing a life insurance policy for yourself, you gain the peace of mind that in the event of your death, your loved ones will not suffer financial struggle with your burial or their ongoing costs of living. Choosing the right life insurance policy for yourself or a loved one can be a confusing and emotionally difficult experience. Understanding the different types of policies available today and the positives and negatives of each type can help guide your decision-making process so that you can purchase your policy and get back to enjoying your life.
Term Life Insurance
In the most basic terms, term life insurance is a temporary policy that covers a pre-determined period of time. Term policies tend to be less expensive than whole life policies. They are also less expensive for those who are young and in good health because the insurer’s risk of having to pay is relatively low.
When premiums are paid on time, a term insurance policy will remain in effect and a benefit will be paid upon the insured’s death. Term policies do not accrue any cash value and they expire at the end of the contracted term. Term policies are available in several different types to meet different individuals’ needs.
Annual Renewable Term
An annual renewable term policy is in effect for one year. As each year’s term expires, the policy will be renewed for an equal or lesser total benefit. The premium amount will change each year to reflect the insured’s current age. However, medical conditions or other concerns that could prevent acquisition of new life insurance coverage are not factored in to the decision to cover or the premium cost.
A level term insurance policy is purchased for a specified duration of time. During that time, monthly premiums remain the same. Long-term level term policies are ideal for those who wish to be able to accurately account for their budgeting for a lengthy period of time.
Level term policies may or may not be renewable at the end of the term. Renewable policies will be reset to an equal or lesser benefit amount and premium amounts will be adjusted to reflect the insured’s current age. Policies that do not offer guaranteed renewal options may instead request new proof of insurability, and if guidelines are not met, may allow for conversion of the policy to a permanent policy.
When selecting a level term policy, carefully consider the term you need. Policies are typically available for terms in increments of five years, some for as long as 35 years. Level term policies with long time frames are a good compromise between the security of a permanent policy and the lesser expense of a term policy. Be sure to understand the renewal terms of your policy as well; in general, a guaranteed renewal option will save you the difficulty and expense of locating a new insurer when you are older and at risk of developing the health problems associated with aging.
Mortgage Life Insurance
Mortgage life insurance is a very specific type of policy designed to pay your outstanding mortgage in full in the event of your death during a particular time period. These policies are ideal for young couples or families who have taken out substantial mortgages in order to purchase their homes. In the case of the primary breadwinner’s death, the family will not need to worry about the stress and sadness of selling the family home and relocating during their grieving process.
Permanent Life Insurance
Permanent life insurance offers a permanent, uncancellable policy to protect your loved ones in the event of your death. Premium payments on permanent policies will increase as you age. For this reason, investing in permanent life insurance when you are young and healthy is a wise financial move that can save you thousands of dollars over the course of your payments.
You will continue making payments on your policy until it has matured. At that time, your funds will continue to be invested in order to accrue value. A permanent policy has a cash value, which you can borrow against or withdraw at any time per the terms of your insurance contract.
Premiums for a whole life insurance policy remain consistent until the policy has matured. They are much costlier than term policies; however, over time, as term premiums rise with the insured’s age, the total amount paid into each tends to remain comparable. A whole life insurance policy provides a flat, fixed payout upon death, regardless of when that occurs.
Whole life policies accrue cash value, against which you can borrow. Loans that have not been repaid upon your death will be subtracted from the total policy payout. Because of the flat premium rate and the ability to access your accumulated cash reserves if necessary, whole life policies have long been regarded as solid financial investments provided you are able to afford the monthly premiums.
Universal life insurance policies were developed to address concerns over the limitations of traditional whole life policies. Several types of universal policies currently exist. In general, they allow for more flexibility in the amount of the death benefit, at the cost of added risk and fluctuating monthly premiums.
As you continue paying your premiums, your policy will accrue a cash value much like a whole life policy would. You have the option throughout your policy period to adjust your monthly premium payments and your projected death benefit payout in order to meet your own budgetary or financial needs. A smaller death benefit could afford you reduced monthly payments, for instance, if you need to maintain your policy but are unable to afford its current cost.
Most universal policies offer you a choice between a fixed death benefit or a death benefit that is composed of a benefit amount plus the accrued cash value. The cash that accumulates in your policy is invested in an effort to reap financial gain. Due to the ups and downs of the stock market and the investment industry, it is possible to lose money at times with this benefit. As a general rule, however, over a lifetime, your cash value will continue to grow.
Limitations and Exclusions on Life Insurance
Permanent life insurance policies are in many cases safer and more secure for consumers. They cannot be cancelled for any reason except charges of fraudulent application. Even fraud concerns must be resolved within a specified period of time, generally two years depending upon the state, in order to be used as reason for cancellation.
Term life insurance policies that do not have guaranteed renewal clauses can be difficult, particularly as consumers age. Finding replacement insurance if you are already suffering from poor health can be extremely expensive. Term life policies that renew may lower the coverage amount and increase the premiums over time, but will continue to renew at the end of each term.
Most life insurance policies contain exclusions for deaths due to war, riots, fraud and other unusual circumstances. Most policies also contain a “suicide clause.” In the event of the insured’s death due to suicide, the policy may not pay any benefits within a certain period of time, typically one or two years, varying from state to state. Suicide may also exclude the payout of death benefits if investigators determine the insured committed suicide strictly to allow his beneficiary access to his benefits.