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Basics of Life Insurance: Term, Whole Life
Just this year, the wife of one of our clients tragically discovered that her husband did not understand his life insurance. He had told her repeatedly that he had “tons” of life insurance but would never allow her to look at the policies. He promised that she would be well taken care of if anything happened to him. He died of cancer in May. She discovered eight different policies in his files. All eight were “accident only.” He did not have a single policy on which she could collect.
That is a true scenario and has no doubt happened many times in different families. You can avoid that heartbreaking situation with a simple understanding of the most common forms of life insurance. Our site is designed to provide you with the most necessary information along with links that will permit you to get quotes on the type of insurance that fits your needs.
Common Life Insurance Terms
A term life insurance policy is temporary insurance. Like renting, you are covered for the agreed upon time period which could be anything from 5 to 40 years. “Cheap” term life insurance is often purchased because it is the least expensive of all types of policies. You pay only the cost of insurance and fees, and if you stop paying the premium, the policy simply lapses. It has no cash value except to the beneficiary upon your death. Its primary value is in protecting a debt or a growing family as it is very low cost for high face values. If you want to make a life insurance decision once in your life without having to worry about higher costs in later years, you may not want Term.
Types of Term Life
While generally not as cheap in cost initially as Decreasing Term, Level Term keeps the same premium and face value for the life of the policy. usually be purchased anywhere from 5 year level to 40 year level.
Frequently sold through the mail. Typically begins with a low premium which is adjusted upwards at regular intervals, usually every five years. Increases in premium are steeper in later years. The policy terminates at the end of the term.
Graded Benefit Term
A policy with few, or no, health questions designed for those who can’t qualify for anything else. If the insured dies in the first two years, premium plus interest is refunded. After the initial two years, the entire face value is paid. A graded policy can also be “modified,” meaning it would have increasing premiums. These policies are fairly inexpensive although more expensive than level term due to simplified underwriting.
Decreasing Term is often sold as mortgage insurance, but few companies offer it any more due to the popularity of level term. It has the cheapest initial premium of any policy and begins with a high face value. Over time the benefit decreases, but the premium stays level. These policies are designed to end simultaneously with the debt they are protecting.
Types of Permanent Life
The opposite of Term Life is Permanent Life insurance. You pay premiums during your entire life or until you reach age 100. If you live to be 100 years old, you no longer pay premium. A permanent life insurance policy will build cash value that you can draw from or borrow against if you ever need to. If you no longer need the policy, you can surrender it for the cash value.
Whole life is one form of permanent live insurance. Guaranteed whole life will have a level premium and a face value that will be paid either upon your death or at the age of 100. Modified whole life will have increasing premiums. Graded benefit whole life will pay the face value provided that the insured does not die until after the two year waiting period. As with the Graded Term, a Graded Benefit Whole Life will have little to no health underwriting.
Universal Life is a permanent life insurance policy that is considered “flexible.” If properly written the premiums will not usually increase. However, you have the freedom to increase or decrease both the premium and the death benefit. Of course, you have to pass underwriting to increase the face value. Additionally, Universal Life builds a separate cash account which helps fund the policy in later years. Consequently, your premium is lower than that for whole life. Furthermore, if you had an emergency you could borrow against the cash account or even take a withdrawal from it.
It is this writer’s opinion that if well done, a universal life insurance policy can be one of the best, most flexible types of life insurance.
Second to Die Life
One Policy for Two People: Some companies offer whole life insurance policies that cover two people with one premium. These could be “first to die” or “second (last) to die.” In the first to die, the money would be paid out if one of the insureds dies, providing the survivor with necessary funds to pay bills and continue living. Last to die is used when the intention is to leave a legacy to a charity or other beneficiary when both of the insureds have passed. The premiums are little if any less than individual policies, but it is sometimes a way to get insurance on a partner who would not otherwise qualify due to health issues
Choosing a Company
It’s always best to choose a company that is financially stable. Life insurance companies are rated by organizations like A.M. Best, Standard & Poor’s, Moody and Weiss. Weiss is most strict, but also the most accurate because it does not accept payment or dues from the insurance companies. It is supported by investors and is thus free to give a highly accurate rating of any company.
Consumer sites such as freeadvice.com provide some information about companies. However, such sites should not be relied on exclusively. People often go online to rate a company only when they are upset with it, and their dissatisfaction is usually a result of not understanding their policy rather than of any wrong doing by the company. A better consumer choice is to check with the Better Business Bureau in your state to find out if the company has received any recent complaints.