Adults who venture out to purchase life insurance are often confused by the sheer variety of policy types, let alone the often-complicated pricing structures of the many contracts up for offer. How should someone approach the challenge and uncover the most fitting kind of contract for their particular situation? The first step is understanding the main types of products available.
Without getting into a dissertation on the complexities of the insurance industry and the multiple varieties of policies carriers sell, it’s helpful to think in terms of four basic categories: term, whole life, variable/universal life and final expense coverage. Here is an abbreviated overview of these four key kinds of choices for consumers.
Whole coverage offers many things in one package. For starters, the premiums are higher than for term insurance. That’s because whole coverage contracts offer a cash value feature, never expire, and include the option for policyholders to borrow against the value of the contract at any given time. For a fixed premium, the insured receives all those options as well as a death benefit amount paid directly to whoever is named as the beneficiary. This kind of arrangement costs more because it gives the consumer a lot of leverage, both financially and logistically.
Some whole contracts include provisions that allow the holder to sell the policy for an amount greater than its face value but less than its death benefit amount. This sale, obviously, takes place during the policy owner’s lifetime and can be a significant source of cash for someone facing an emergency or just wanting to invest the money in the market. Consumers can check out this company to opt for a life settlement for those who are interested in receiving their paid-up premiums along with some amount of interest that has been accrued since the inception of the contract. This option is one reason many people choose to purchase whole rather than term insurance, which does not allow for a life settlement of any kind.
Term insurance is a straightforward product. You pay a fixed amount per year, or month, for a fixed death benefit. The policy lasts for a set number of years, typically 10, 20 or 30. When the time is up, the contract no longer exists. What’s the big advantage? Low cost. The downside is that all your premiums are gone if you outlive the time period. Plus, you can’t borrow against the policy or change the amount of the premium during the term.
Variable & Universal Coverage
Variable and universal contracts are very similar to their cousin, the whole contract. But holders of variable policies are able to have their premiums invested directly into a market-based account that can earn as much or as little interest as the economy provides. Universal contracts don’t allow for market-based investing, but do let owners change the amount of the premiums or death benefit when they wish to do so.
Final Expense Policies
Final expense policies pay for funeral, cremation and final medical bills. These financial instruments only make sense for people who can’t afford to pay final expenses from savings or regular insurance proceeds.