Life Insurance: Exploring Unique Characteristics And Features

Life insurance is a legally binding contract that promises a death benefit to the policy owner when the insured person dies. There are several types of life insurance, each with its own unique characteristics. The two main types of life insurance are term life insurance and permanent life insurance. Term life insurance is designed to last for a specified period, such as 1, 5, 10, or 30 years, while permanent life insurance provides coverage for the insured person's entire lifetime as long as premium payments are maintained. Within these two main categories, there are several subtypes of life insurance, including whole life insurance, universal life insurance, variable life insurance, and final expense life insurance. Each type of life insurance is designed to meet specific needs, such as coverage for a certain number of years or straightforward, lifelong coverage.

Term life insurance

Fixed Coverage Amount

Temporary Coverage

One of the defining features of term life insurance is that it provides coverage for a limited period. This temporary nature leads to lower startup premiums compared to permanent life insurance. However, once the policy expires, securing an extension may be challenging due to worsening health conditions, and premiums will be recalculated based on the policyholder's age at renewal.

No Savings or Investment Component

Unlike permanent life insurance, term life insurance does not accumulate wealth over time. It does not have a savings or investment component and solely focuses on providing a death benefit. If the insured person outlives the policy term, there is no payout, and the premiums paid are not returned.

Medical Exam for Qualification

Similar to other types of life insurance, term life insurance usually requires a medical examination before issuing a policy. The insurance company may also inquire about driving records, current medications, smoking status, occupation, hobbies, and family history to assess the risk and determine the premium.

Tax-Free Inheritance

A significant advantage of term life insurance is that it offers a tax-free death benefit to the beneficiaries. They are not required to pay taxes on the funds received, allowing them to use the entire benefit to settle healthcare and funeral costs, consumer debt, or other expenses.

Different Types of Term Life Insurance

There are several types of term life insurance, including level term and decreasing term. Level term insurance offers a fixed death benefit throughout the policy, while decreasing term insurance reduces the potential death benefit over the policy's term, typically in one-year increments.

Whole life insurance

Life insurance is a crucial financial tool that provides financial security for individuals and their families in the event of unforeseen circumstances. One of the most prominent types of life insurance is whole life insurance, which stands out for its permanent coverage and unique characteristics.

One of the defining features of whole life insurance is its cash value component. With each premium payment, a portion is used for life insurance coverage, while the remainder accumulates as cash value or loan value. This cash value grows over time, similar to a savings account, and can be accessed by the policyholder through withdrawals or loans. The cash value aspect not only helps individuals build a financial asset but also serves as an investment vehicle, as it grows tax-deferred, and policyholders benefit from the insurance company's investments. However, it's important to note that outstanding loans and interest can decrease both the death benefit and the cash value.

While whole life insurance offers permanent coverage and valuable benefits, it is generally more expensive than term life insurance. The higher premiums are due to the policy's accumulation of cash value and the lifelong coverage it provides. As a result, individuals must carefully consider their financial goals and needs when deciding between whole life and term life insurance.

Universal life insurance

One of the main advantages of universal life insurance is its flexibility. Policyholders can adjust their premiums and death benefits according to their circumstances, and the cash value can be used for emergencies, home repairs, college tuition, or business investments. Additionally, universal life insurance typically has lower premiums than whole life insurance, making it a more affordable option for permanent coverage.

However, there are also some disadvantages to consider. The returns on universal life insurance policies are not guaranteed, and there is a risk of large payment requirements or policy lapse if the cash value falls too low. Additionally, some withdrawals from the policy may be taxed, and upon the policyholder's death, the insurance company retains the cash value, with the beneficiaries receiving only the death benefit.

Variable life insurance

You can also allocate money toward a fixed account to receive a fixed rate of interest and reduce overall risk. This rate may change annually, but there is typically a guaranteed minimum, such as 3%.

Variable universal life insurance (VUL) is a type of variable life insurance that offers flexibility. In addition to death benefit protection, VUL allows you to allocate among purely market-driven and fixed options with guaranteed minimum interest crediting. With a wide range of investment options, you can adjust your policy's allocations to meet a potential lifetime of growth objectives and risk tolerances—all in one flexible policy.

Final expense life insurance

• No medical exam required: Most final expense insurance plans do not require a formal medical exam. Instead, you answer a few health questions on the application, making it more accessible to seniors with pre-existing health conditions.
• Fixed and competitive premiums: Final expense insurance offers fixed premiums that do not change over time and are generally lower than other types of life insurance.
• Easy application and quick approval process: Final expense insurance has a simple application process, and coverage can often be issued within days or even on the same day as the application.
• Coverage for end-of-life expenses: Final expense insurance covers funeral arrangements, burial costs, cremation, and any remaining medical, legal, or credit card expenses.
• Building cash value: Final expense policies can build cash value over time, allowing you to withdraw cash, borrow money, or pay premiums.

The cost of final expense life insurance depends on various factors, including age, sex, health, and the chosen coverage amount. The average policy costs between $30 and $70 per month, with rates increasing substantially for older individuals. For those over 70 or with significant health conditions, the premium may be higher, ranging from $70 to $120 per month. Younger and healthier applicants may qualify for rates between $20 and $50 per month.

Frequently asked questions