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Types of Life InsuranceLife Insurance

Life insurance is considered by many to be a necessary planning tool to make certain that your loved ones are provided for in the event of your death. The most common reason for purchasing life insurance is to provide for a spouse or young dependent children, but there are many reasons that people consider purchasing life insurance, among them are:

  • Providing for spouse or young dependents
  • Providing for elderly parents or other dependents
  • Paying final expenses, such as administrative expenses and burial costs
  • Paying medical costs after death that may accumulate from prolonged illness
  • Providing inheritance for heirs
  • To make planned charitable contributions after death
  • As a savings vehicle
  • As an estate planning tool
  • Protect a business from hardship caused by death of owner or key personnel

The types of life insurance plans offered have increased over time, and become more and more complex. Below you will find information about common types of life insurance. We recommend that you speak to a licensed insurance professional to assist you in the purchase of any life insurance contract.

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This website contains links and phone numbers to contact licensed insurance agents. We invite you to contact us to discuss your needs. You may also wish to contact a local life insurance agent. We recommend that you always deal with a professional that answers your questions and takes time to explain your options until you are comfortable. It is your agent’s job to help you understand the details of a policy before you make a purchase.

Term Life Insurance

Term life provides life insurance coverage for a specified period of time, or to a specified age. The policy does not accumulate a cash value. Term insurance is generally considered "pure" insurance, where the premiums paid by the insured pay for the death benefit only, and do not contribute to a cash value or surrender value.

Life Insurance PolicyTypes of Term Insurance:

Three of the most common types of term life insurance include level term, mortgage life, and annual renewable term life.

Level term - is the most common of the several types of term insurance are typically available. Level term life insurance has a set premium for the duration of the coverage, and typically is sold for durations of between five and thirty years. The policy will also have a set death benefit or face value, which typically does not change over the policy’s term.

Mortgage life - is another type of term insurance, it is usually a ‘decreasing term’ policy which has level premiums and a death benefit equal to the outstanding principal balance of one’s mortgage.

Annual renewable - is a type of term life where the option to renew the policy is guaranteed by the insurer at each policy anniversary date. When renewed the premiums will be calculated based on the insured’s attained age at the time of renewal.

Key considerations when purchasing term insurance are; the face amount (or death benefit), the premium (or cost) and the duration of coverage (or term). Additional considerations may include guaranteed renewability or convertibility options. These are important provisions included in some life insurance policies which allow the policyholder to extend the term coverage or convert term coverage to permanent life insurance at a point in the future, without having to re-establish insurability.

 

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Permanent Life Insurance

Permanent life is a type of life insurance that remains active until the policy matures or until the death of the insured person. The policy cannot be cancelled by the insurer for any reason, other than; non-payment of premiums due, or for a fraudulently completed application. A permanent insurance policy includes a savings component, which accumulates a cash value. Permanent life is therefore typically more expensive (carries a higher premium) than term insurance with a similar face value or death benefit.

Types of Permanent Life:

Four common types of permanent or cash value life insurance are whole life, universal life, limited pay life and variable life.

Whole life insurance - is a type of permanent life insurance, which stays active for the entire lifetime of the insured, usually Life Insurance for Dependantswith a level premium. A portion of the premiums paid contributes to a cash value build-up, or savings component. The cash value reserve is guaranteed by the insurer, and is typically accessible by the policyholder during their lifetime through policy loans. The cash value also grows on a tax-deferred basis, which is an important consideration for some. Premiums on whole life are typically paid until age 100, although insurers may offer different premium terms including premiums that are paid over a specified duration (often called limited payment whole life, or just limited pay, terms of ten, fifteen, twenty, or twenty-five years are not uncommon). Single premium whole life is another common variation, however these types of policies may be treated differently than other whole life contracts, and may not enjoy the same tax-deferred status on cash value reserves. A single payment whole life policy considered a modified endowment contract (MEC) for purposes of taxation. If considering these types of policies be sure to consult a professional to understand both the insurance policy you are purchasing as well as the tax implications.

Universal life insurance - is a variation of permanent life insurance meant to combine some of the features of whole life (protection until the death of the insured) with greater flexibility than traditional whole life policies offer. With a universal life policy, the premiums paid are credited to a cash value or account value, from which expenses are deducted, including the cost of insurance. Past premiums paid along with interest accrued (typically paid at a guaranteed rate by the insurer on universal life policies) increase the cash value of the policy, and as long as there is sufficient cash value to cover premiums due (and any other usual deductions or expenses), the policy will stay in force. Similar to whole life policies, insured parties can typically access the cash value of their policy through loans or withdrawals. Such withdrawals or loans will affect the cash value as well as the death benefit payable on a universal life policy.

Limited pay life insurance - can be though of as a payment option on a whole life policy. With a limited pay policy the premiums are paid for a defined period of time (e.g. ten, fifteen or twenty years), but the coverage stays in effect until death or policy maturity.

Variable life insurance - is a type of permanent life insurance where the cash value and the death benefit are tied to the performance of underlying investments. If the underlying investments do well, the cash value and death benefit will increase, if the investments perform poorly however the cash value and death benefit will decrease. Variable life policies will generally have a minimum death benefit value, but the cash value generally has no minimum. A guaranteed death benefit may require a higher premium. The types of investments offered with variable life insurance today can include mutual funds as well as other types of securities. Variable life policies are sold by some insurance agents (who also hold securities licenses) and by stockbrokers. Variable policies can be very complex instruments, and you should be sure to understand the policy and it’s investments.

 

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