You likely know what the main purpose of life insurance is: to secure a death benefit that beneficiaries can use to cover final expenses and replace income. This is a very important purpose, which if others depend on you, makes like insurance something to consider seriously.
However, this is only one aspect of the life insurance story. Policies have evolved to include cash value accumulation and accessible benefits. With certain features and policy types, you can even accelerate a death benefit to help cover terminal conditions.
Types of Life Insurance
Given the numerous options you have available to you, understanding life insurance can sometimes be difficult. Although there are many variations, life insurance can be separated into two main categories: term (temporary) and permanent.
Term (Temporary) Life Insurance
As the name suggests, term life insurance policies grant coverage for a set period of time (i.e. term). These terms are usually available in ten-year increments. Should the insured decease during the period, a payout is issued to beneficiaries. Should the insured outlive the term, coverage is terminated. It may be possible, depending on the carrier or contract type, to renew for another term or convert to another type of life insurance. Unlike permanent life insurance, term life policies do not gather cash value.
Level Term Insurance is the standard form of term life, as discussed above.
Return of Premium Term Life Insurance remedies some of the disadvantages with level term. A term policy can be cost effective, but generally if you outlive the policy you do not receive anything. With return of premium, premiums will be returned to once the contract expires.
Permanent Life Insurance
Unlike term life polices, permanent life insurance policies provide lifetime protection, as long premiums and other applicable charges are met.
In addition to lifetime protection, these contracts accumulate tax-deferred cash value. Not only can accruing value increase the final death benefit amount issued to beneficiaries, this cash value may be accessed during life. The accessible cash value can help with unexpected expenses, serve as an additional source of retirement income, or finances other items, such as vacations.
There are three core types of Permanent Life Insurance:
This policy is structured to last the policyholder’s entire life, with the stability of fixed premium payments and cash values that accumulate at a guaranteed rate of return.
Like whole life, this type of permanent life insurance is designed to last for the insured’s entire life. However, policyholders can flex premium payments and select from a level or increasing death benefit.
Fixed Universal Life
As with Universal Life insurance, this plan features flexible premium options. However, cash values reflect current interest rates or fixed to a specific stock market index, such as the Standard & Poor’s 500 index.