If you’re considering working in the life insurance industry, then it’s important to understand that there is no one generic “life insurance.” Rather, there are several different types of life insurance available, each with its own advantages and drawbacks. In this blog post, we explore five of the most common types of life insurance and what they offer or do not offer for policyholders.
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Term Life Insurance
The simplest and one of the most common forms of life insurance, term life insurance lasts for a set number of years before it expires. If a policyholder dies before the term is up, a set amount of money, known as the death benefit, is paid to their beneficiary. If they don’t die within that timeframe, it expires with no payout. There are two basic types of term life insurance: level term, which means that the death benefits stay the same throughout the duration of the policy, and decreasing term, which means that the death benefit drops (usually in one-year increments) over the course of the policy’s term. Over 90% of life insurances bought are level term.
Whole Life Insurance
As opposed to term life insurance, whole life insurance has no expiration. It not only has a death benefit but also a cash value in the form of a tax-deferred savings account that accrues interest at a predetermined fixed rate. Each month, a certain portion of the policyholder’s premium goes into the cash value of the policy, which offers a guaranteed rate of return. Whole life insurance can cost anywhere from five to 15 times as much as a term policy, for the same death benefit amount.
Universal Life Insurance
As with whole life insurance, universal life insurance (also known as “permanent life insurance”) has a cash value. Thus, premiums go towards both the cash value and death benefit. The difference, however, is that universal life insurance policyholders can change the premium and death benefits amounts without having to get a whole new policy. This means that as long as the policyholder has enough money in the cash value, they can use that money to skip premium payments entirely by letting the accrued interest do the work. While this is an attractive option for some people, to others it is downright confusing. Constantly changing premiums and death benefits are more complex than what most people need, and it comes at an added cost.
Variable Life Insurance
Variable life insurance also has a cash value, the functions of this value are quite different than that of whole life insurance. While the cash value of a whole life insurance policy comes in the form of a savings account, with a variable life insurance your cash value is tied to investments, such as bonds or money market and equity accounts. This makes variable life insurance high-risk, but it also can mean potentially huge gains; and it allows policyholders to take partial withdrawals or loans against the cash value.
Simplified Issue Insurance
This is a life insurance policy that can be approved with minimal health questions. It is geared towards people who need to obtain life insurance coverage right away and/or those who don’t want to submit to a medical exam. It is designed to provide a limited amount of life insurance quickly, without the four-to-eight week wait time typical of most policies. There’s no requirement of a medical exam, so a person can have coverage in days, rather than weeks or even months. Since there is no medical exam, however, insurance companies have hardly any way to assess risk, which means that simplified issue premiums are typically much more expensive than term policies.
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