Life insurance policies can be quite tricky due to the several different types that are out there, and understanding them can be even harder. Don’t worry, we’re here to help you break down each one and what they mean for you.
In general, life insurance policies fall into one of two buckets: Term Life Insurance or Permanent Life Insurance.
Terms to know
Before we jump into it, here are some terms that will help you better understand the topic.
Premiums are the payments being made by you to the insurance company in exchange for your policy.
Beneficiaries are the person or people –of your choosing– that will receive a cash payment when the covered person dies.
Death benefit (or policy payout) is the total amount of money (lump sum) that the insurance company will pay out once the covered individual passes away.
Cash surrender value is the amount of money that a life insurance company will pay to the policy owner voluntary termination of the policy before its maturity or death of the insured.
Types of life insurance policies
Term Life Insurance is the most basic of the life insurance policies. It has a term of 10, 20, or 30 years and is the less expensive life insurance policy option.
It’s typically easier on your pocket in the short run, but it doesn’t have a cash value component.
So, your monthly premium would remain the same amount throughout the life of your policy. Once the term is up, however, there will be no type of payout. So, If you outlive your policy, your beneficiaries will not be receiving a payout of any kind. If you decide to get another life policy once that term policy expires, it will likely come at an elevated cost. The older you are, the more expensive it will be.
Convertible life insurance is a type of health insurance that works like a traditional term lifelife insurance policy in the sense that it has a set term and has no cash value component, but what makes it different is that it has the option to convert your life insurance plan into either a universal or whole life insurance.
Once you convert your plan to one of the aforementioned plans, you will enjoy the same benefits (and limitations) as those plans (universal or whole life insurance).
This type of plan is more expensive than a regular non-convertible term life policy and has a conversion deadline, which means there’s a point where you can no longer convert that policy. So for example, if your policy states that 65 years old is the cutoff deadline, then you as the policyholder have to elect to convert it before that age or you will not be able to do so.
Whole Life Insurance is the more expensive option, but it also guarantees your death benefit as long as your premiums are paid. The premiums, generally, will stay the same for the length of the policy.
So, although Whole Life Insurance is more expensive in the short run, there’s a guaranteed payoff and there aren’t any term limits to worry about.
Universal Insurance is the more versatile type of life insurance. It offers permanent coverage (like whole life insurance), but you can make lower or higher payments depending on how well the insurance company’s investments do.
If they do well, you may be able to stop making payments altogether. If they do poorly, you may have to make higher payments.
Unlike term and whole life insurance, universal life insurance had a couple of different types of policies.
Other types of universal life insurance policies
Guaranteed universal life insurance is great in the sense that you are guaranteed a death benefit payout, your premiums will never change, it’s more economical than whole life and other types of universal life insurance policies. There is little cash surrender value and it requires premiums to be on time or run the risk of forfeiting your policy.
Indexed universal life insurance is a policy that links the cash value of the policy to a stock market index. So, the cash value of the policy could see important gains over time if the stock market does well. But, due to the stock market investment aspect of this policy, it requires a lot more monitoring than other types of policies. The cash value gain, however, is subject to a cap.
This type of policy allows you to adjust your death benefits depending on your needs, and it’s also flexible enough that it is possible to decrease your premium or skip a payment, as long as your cash value covers the amount. However, if your cash value cannot cover the premium payment that you skipped your policy could lapse.
Variable life insurance is a policy that is connected to an investment account like bonds or mutual funds. The premium is generally fixed and the death benefit is guaranteed, independently if the stock market is doing well or not.
Variable universal life insurance is also tied to the market, but the premiums are adjustable and death benefits are not guaranteed.
Variable and variable universal life insurance policies require quite a bit of work due to the fact that you have to monitor the stock market, but it also has the potential for big gains that you can borrow against or make partial withdrawals from the cash value.
Looking to cash in on your policy?
How much you get from your policy depends on many factors, you can read more here. Is this option relevant for you? Get more information here.
