Life Insurance 101

What will be the best type of life insurance to stick to? The answer depends on multiple circumstances and conditions, some of which include the duration of the contract, the price, and the withdrawal option.

The most common types of life insurance are term life insurance, whole life insurance and universal life insurance.

Term life insurance is usually convenient for an average citizen, as it is the cheapest one. It is limited to a definite time period. If the insured person doesn’t die during these years, the policy expires without any payout option. Whole life insurance, together with other permanent policies, is the one which eventually gains value. Universal life insurance provides regular payments and a fixed death benefit.


Term Life Insurance

It is a temporary insurance, which lasts several years. Before you stick to this type of insurance contract, think about two major aspects: amount of time and amount of money. Among the advantages of this system is the fact that it’s the cheapest insurance, affordable for everyone. The biggest disadvantage is a high chance of outliving your policy. If you decide to renew the process after the expiration, you might have to pay more due to your older age and worse health condition. For term life insurance, policies usually last from 10 to 35 years. This is the death only insurance, which means that it covers mortgage reliability, funeral costs, and some other family’s expenses.

Whole Life Insurance

This is a permanent insurance contract. The most important thing is to pay, and the insured person has nothing to worry about. The amounts of your payments don’t change. You receive a 100% guarantee of «cash value» investment component return. The total sum of the death benefit is unchangeable. One obvious advantage of whole life insurance is that it is valid throughout your life. But the downside is its price, of course.


Those are the main types of contracts. Let’s take a closer look at the variations of policies with their own nuances and special points.


Guaranteed Universal Life Insurance

According to their policies, the amount of regular payment is the same, and they guarantee a fixed death benefit. The most important condition is to make timely payments. Otherwise, a person can lose the contract. A good thing that it costs less than whole life insurance. But missing a payment might mean the loss of benefit. The cash value is insignificant or absent.

Indexed Universal Life Insurance

An interesting thing about this kind of insurance is that its value depends on a stock market index. The amount may vary throughout the whole period of the contract. An obvious perk is that the cash value eventually grows. The drawback is that there are no guarantees on a final benefit amount.

The amounts of your gains are also limited, and you can not get more than it is stated in your contract. Even if the growth is 15%, but your cap is 10%, you only get 10%.

This policy also has a flexible payments system. For example, you are allowed to skip a payment once in a while, as long as your cash value is enough to cover the costs.

Variable Universal Life Insurance / Variable Life Insurance

With this kind of insurance, the beneficiary’s cash value is tied to investment accounts. It is exposed to market fluctuation and can result in different final amounts. Big gains, as well as losses, are possible here. The insured person can take advantage of the cash value: withdraw money or take loans. What can be a bit risky, is the fact that you need to control the amount of your cash value, as it changes day to day. Before the payment converts into your cash value, all sorts of taxes and fees are deducted from it.


Underwriting Different Life Insurance Types

If the policy is underwritten, this means that your insurance company takes a decision on how much you will have to pay on a regular basis.

It is necessary to be examined by a doctor before you get insured. The life insurance is fully underwritten when you are healthy or have just a few insignificant issues. The healthier you are the less you pay.

When you fill in the application you will have to indicate the information about your and your family’s health story, your hobbies (especially extreme kinds of sports) and travel plans.

Life expectancy is deducted according to this underwriting, and the insurance company sets the amount of regular payments.

In some cases, you will not be obliged to take a full examination. Instead of it, you will be asked some questions about your health. There is a high chance that your request can be rejected depending on your answers.

In another case, the candidate takes no medical exam, has no interviews, and cannot be turned down. This insurance plan is the most expensive of all with relatively small amounts to be paid back (up to $100,000). Additionally, if the person dies during the first years after signing the contract, there is only a small part of the sum paid to the beneficiaries.


Other Types of Life Insurance

Mortgage life insurance: Only the current balance is covered, and the payment doesn’t go to the family, but to the lender.

Credit life insurance: Covers only a certain loan. It the person dies, the lender receives the money instead of the family.

Accidental Death and Dismemberment: It means that beneficiaries only get the payment if the insured person died because of an accident. If the accident resulted in any handicap, payments are also possible.

Joint life insurance: It is the situation when both spouses sign one contract. In one case, the spouse gets the payment after the first one has died. In another case, the beneficiaries (more often — children) get the payment in case of death of both spouses.