Adults who want to buy life insurance have a lot of options. Depending on your needs, you can select from at least a half-dozen different kinds of policies. Sometimes it's said that there are just three types of life insurance, but in reality, there are at least a dozen different variations and combinations of the various kinds of policies. Each one has its own cost structure and benefits. Choosing the right policy based upon your specific needs is important. Here are the basics about life insurance policies:
A term life policy, as its name implies, lasts for a specific “term,” or time period. After that, if the policy holder is still alive, the term policy ends and no funds are paid to the beneficiary. Term life is the least costly version of life insurance. The vast majority of term life insurance policies are “level premium” products. Namely, for the entire term, the premium never changes. There are fewer common versions of term insurance in which the coverage amount decreases as time passes or where the policy renews at the end of each year within the term.
Whole life is one of the many “permanent” types of insurance. These policies are designed to do more than just pay a monetary benefit when the policy holder dies. There is no “term,” or designated length of the policy. It's always in force as long as you make the premium payments. When you die, it pays a death benefit to whomever you named as beneficiary. Whole life and other permanent forms of life insurance include some type of savings feature. This part of the policy can build loan or cash value over time. The policy holder can borrow against the cash value, invest it or even withdraw it, depending on how the specific policy is structured. This “savings aspect” is what sets permanent insurance apart from term insurance.
Another popular type of permanent insurance is universal life. While whole life policies typically include a guaranteed cash value and level premiums, universal life policies offer more flexible premium amounts, a savings option, death benefits and the option to temporarily stop making premium payments if the holder faces financial difficulties.
Rates and Reasons
Insurance companies have two basic methods for issuing policies: full underwriting and simplified issue. Fully underwritten policies require a medical exam and often have lower premiums. Simplified issue policies don't require an exam but applicants must answer written questions about their health. The four key factors that determine rates are gender, lifestyle, marital status and location. In addition to those factors, companies will use either the results of medical exams or the applicant's answers to health questions as a fifth component of the rate-setting process. The majority of people who purchase life insurance do so for one of three reasons:
- To replace their income so surviving loved ones won't have to struggle financially
- To help cover the cost of paying a mortgage in full
- To cover so-called “final expenses,” including the cost of a funeral or cremation