One of the best ways to protect your family’s future is through a life insurance plan. Unlike other types of insurance, though, there are many different types of life insurance and it can be challenging to figure out which type is best for you.
Understanding the different types of life insurance policies available will make it easier for you to choose the one that would provide you the protection you and your family need. Here’s an in-depth look at some of the most common types of life insurance.
Term Life Insurance
Term life insurance policies provide coverage for a specific period of time. This coverage period is called the term, which is how the policy gets its name.
Term life insurance is also the simplest form of life insurance you can purchase. It provides a death benefit to your designated beneficiaries should you pass away during the term period. If you don’t pass away during the term, the policy simply expires with no death benefit paid.
Most term life insurance plans will last between 10 and 30 years. When the plan starts, it will have a set payout amount, which–along with your medical and risk factors–will determine what your premiums will be.
For example, if you purchase a 20-year term life policy worth $400,000, your beneficiaries will receive a death benefit of $400,000 if you pass away within those 20 years. It’s as simple as that.
Whole Life Insurance
Whole life is a form of permanent life insurance, in that it provides a death benefit no matter when you pass away. In addition to the permanent death payout, though, whole life insurance also has an investment component to it.
Monthly premiums to whole life insurance are higher than term life, because part of that premium goes toward what’s known as cash value. This value grows over time for the entirety of your life.
In this way, whole life insurance acts as part term life (with a death benefit) and part savings account (with the cash value). Many people prefer whole life insurance because of the cash value and guaranteed death benefit, while others may choose to take the extra premium and put it into their own investment accounts instead.
Universal Life Insurance
Universal life is similar to whole life, except that you can potentially adjust the monthly premiums by accessing a portion of the cash value that the plan has built. You’ll be required to pay the minimum monthly premium to keep the plan–and the death benefit–but you can adjust the rest of the premium you pay toward the cash value.
The big advantage of universal life is that you could potential borrow against or withdraw the cash value of the policy. As your policy’s cash value grows, you can adjust your monthly premium to potentially lower your costs.
No Medical Exam Policy
One of the biggest trends in life insurance is a no medical exam policy. With this policy, you don’t have to go through a detailed medical screening to get approved.
Many of these plans work the same way as “traditional” life insurance policies. The only difference is the fact that you won’t have to go through the process of being medically examined to be approved.
An endowment policy combines a term life insurance policy with a savings plan. When you sign up for the policy, you’ll choose how much you want to contribute monthly to the savings portion and when you want the policy to mature. Your selections will then determine the guaranteed payout of the policy.
If the policyholder passes away during the term of the policy, beneficiaries will receive the death benefit. If the policyholder survives the maturity date, then the policy will pay out the guaranteed benefit to the policyholder.
Money Back Policy
Money back policies are also known as return-of premium life insurance. This is an alternative to a term life insurance plan. If you outlive the term of the policy, it will pay you back all or a portion of the premiums you paid. This way, you can still get something out of the policy.
You pay monthly premiums just like you would with a term life insurance plan. However, if you outlive the policy, you’ll have all those premiums returned to you. You won’t get any interest on that money, though, but it’s also not taxable since it’s essentially a refund.
The big downside to these policies is that the premiums are often significantly higher than a typical term life insurance policy. Some people may choose to instead take the extra premium and invest it in a safe account that at least returns some interest.
Savings & Investment Plans
All whole life insurance plans are considered savings and investment plans. The savings part of it is the term life portion. You pay a certain amount in premium each month and are guaranteed a payout based off that. You cannot lose this portion of the plan.
The investment part is the cash value portion. This value grows over time, based on a number of factors, including whether the plan’s cash value portion is tied to a stock index or the stock market at large.
This is a strategy that many people will take to not only provide financial protection for their beneficiaries, but also set aside a certain amount of money each month for savings.
Life insurance retirement plans, also known as LIRPs, helps policyholders supplement their retirement income along with traditional life insurance.
Again, this type of policy uses the cash value portion to act as retirement savings. LIRPs use the same basic principle of Roth IRA plans. You fund the premium with after-tax dollars and you aren’t taxed when you withdraw the funds after you reach 59.5 years old. Cash gains the plan makes are also tax deferred.
Unit Linked Insurance Plans (ULIPs)
Unit Linked Insurance Plans, referred to as ULIPs, are a combined policy that includes a death benefit payout as well as an investment in bonds or equities. Like other whole life insurance, a part of the monthly premium for ULIPs goes toward the life insurance, while the rest goes toward the investment portion.
These plans are called unit linked because the investment portion is pooled with other policyholders in the investment. In this way, they operate similarly to traditional mutual funds.
In the same vein, these plans typically operate with a defined investment objective. ULIPs allow policyholders to buy into one investment strategy or multiple funds in an effort to diversify.
Child Insurance Policy
A child insurance policy works the same way that a traditional life insurance policy does for adults. If the child passes away, the beneficiaries will receive the death benefit. In almost all cases, the beneficiaries are the parents.
The policyholder in this case will be the parent, legal guardian, or possibly even grandparent. The beneficiary can then either be the policyholder, or it can be someone else. For example, a grandparent may purchase a child insurance policy and, therefore, be the policyholder, and then designate the parent as the beneficiary.
Most child insurance policies are whole life plans that also have an investment aspect. The premiums typically lock in for the life of the plan, meaning they can’t ever increase. For this reason, many parents (and grandparents) think of them as solid investments for their children.
Work with an Insurance Marketing Organization
As a leading Insurance Marketing Organization (IMO), Good Life Insurance Associates (GLIA) provides a full range of insurance products, back-office services, and tools to support your individual clients’ wants and needs. We provide financial advisors and insurance agents in our network across the country with access to a full range of premium carriers, expert support services, and an industry-leading compensation plan.
Contact us today to learn how we can help you establish and grow your insurance business.