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Life Insurance

Life insurance is a type of insurance policy where the insurer agrees to pay out a certain amount of money in the event of the insured's death. A lesser-known fact about life insurance is that it is not always dependent on the death of the policyholder. Sometimes a life insurance payout can be triggered if the policyholder is critically or terminally ill. 

Designated beneficiaries get the payment in the event of the death or illness of the insured. Life insurance is helpful in the event of a death or illness, where the policyholder's loved ones can use it to pay for the cost of care, funeral or cremation costs, estate settlement costs, debt repayment, and more. It takes the burden off the living who have to figure out how to pay for these costs while working through their grief.

Getting A Life Insurance Policy

Before getting a life insurance policy, it is essential to know the exact policy that will suit your needs. In addition to taking into account age, weight, height, life expectancy, and health history, a prospective policyholder also needs to consider their budget and the assured sum. 

Some life insurance policies carry low premiums, but their assured sum also comes out to a lesser amount. Insurance plans need to be tailored to the needs of the policyholder. 

Getting a good life insurance plan comes down to what the policyholder wishes to achieve with the plan. Suppose an individual wants to make sure their loved ones are taken care of in the event of their death. In that case, it is advisable to go for a plan with an approximate payout that would enable the policyholder's family to maintain a reasonable standard of living after they die.

Types Of Life Insurance

Getting life insurance is dependent on the intended policyholder. Many factors go into picking a life insurance policy, like age, finances, payout, and duration of the policy. Life insurance policies can differ greatly from one to another. Some last for a lifetime, while others only last a specified number of years. Here are the most common types of life insurance policies.

Permanent Life Insurance

Permanent life insurance is a policy that lasts for the entirety of the insured's existence. For this policy to be valid, the insured must pay premiums on the policy for the rest of their lives. The policy only becomes defunct if the policyholder no longer pays the premiums or surrenders the policy. A permanent life insurance policy carries a higher premium compared to other types of insurance policies.

Permanent life insurance is further subdivided into categories. These include whole life, universal life, variable universal, and indexed universal. Each sub-category possesses unique features that apply to different policyholders.

Whole Life Insurance: This life insurance policy is designed to last until the policyholder is deceased. The insured is guaranteed the payout in the event of their death, and the premiums for this policy are fixed. However, the final payout does not change. 

Whole life insurance policies typically carry higher premiums, but coverage lasts for the entirety of the holder's life, and the policy builds cash value over time. Endowment ages for whole life insurance policies are typically 100 years.

Universal Life Insurance: A universal life (UL) insurance is another type of permanent life insurance that lasts until the policyholder dies. However, unlike whole life insurance, universal life carries an investment savings element. 

Premiums on universal life insurance are lower compared to whole life, and policies can carry flexible premium options. Excess premium amounts in this policy are credited to the cash value of the policy. So if no premium is made for a month, then the policy is debited by a cost of issuance (COI) charge, in addition to fees and other charges.

Universal life insurance can be invested in riskier investment options, hence offering lower premiums for the insured. 

Variable Universal Life Insurance: A variable universal life insurance (VUL) allows the policyholder to direct their policy's cash value to separate accounts. These accounts can be invested in riskier options like stocks or bonds that carry higher growth potential.

VULs are flexible in their premium payments. Premiums can range from zero to maximum amounts as stipulated by the Internal Revenue Code for life insurance. A disadvantage of VULs is that missed premium payments can lead to forfeiture of the entire policy. It doesn't matter when a policyholder dies; as long as there is enough cash value in the policy, the death benefit will be paid to the beneficiaries. 

Indexed Universal Life Insurance: An indexed universal life (IUL) insurance policy comes with a death benefit coupled with a fixed or equity-indexed rate of return on the cash policy. The policyholder can withdraw and take loans out of the cash account or use it to pay premiums on the life insurance. 

The cash value of the account is linked to the performance of a stock market index such as the S&P, and interest is determined based on the stock index's performance. 

Premiums and death benefit payouts of IULs are flexible depending on the performance of the stock market. However, investment caps prevent the account from taking full advantage when the stock market performs well. The policyholder will also need to monitor the investments to make sure that they are not incurring losses on their policy. 

Term Life Insurance

A term life insurance is a type of life insurance where the insurer only pays out the policy if the insured dies within a specified time. So unlike whole life insurance, a policyholder would have to agree to a time frame through which the policy is valid. If the policyholder does not die within this period, they can either renew the policy for a longer term or forfeit it entirely.

Some of the key features of a term life insurance include;

  • Being able to convert it into whole life insurance once the specified term lapses

  • Unlike whole life insurance, term life insurance does not feature any savings or investment components. It is based solely on the death of the policyholder.

  • Factors like age, weight, health history, sex, and life expectancy affect the premiums paid on a policy. 

  • Term life insurance can be purchased for a period of 10 to 20 years, after which the policyholder can renew, terminate, or convert into a whole life insurance plan.

 • Each renewal comes with a higher premium than the last.

Types Of Term Life Insurance

Term life insurance policies come in different types. Each one carries its unique terms in the contract between the policyholder and the insurer. Furthermore, premiums and payouts for each type can also differ based on circumstances. It is important to know the options available before getting a term life insurance policy.

Level Term Life Insurance Plan: This is the most common type of term insurance plan. It is very simple in the fact that premiums and benefits are set at the start of the contract and remain the same throughout the lifetime of the policyholder. 

However, in the case of a level term insurance plan, the premiums tend to be higher compared to policies renewed every year. This is because the insurer has to factor in costs associated with issuing the policy over the lifetime of the policyholder, and this is worked into the policy premiums.

Increasing Term Life Insurance: This insurance plan provides flexibility by allowing the policyholder to increase the payout benefits annually. These policies usually carry higher premiums than level term plans because the policyholder is allowed to change the payout sum while also maintaining the previously agreed-upon premium.

Decreasing Term Life Insurance: As the name implies, it is the opposite of increasing term life insurance policies. In decreasing term life insurance, the payout benefits in the event of death decrease with each passing year.

The premium does not change, and the benefits decrease at a frequency agreed upon between the policyholder and the insurer. These types of plans come in handy when the policyholder has taken out a home or personal loan as the payout decreases with the principal amount of the loan.

Convertible Term Life Insurance: A convertible term insurance plan means that the policyholder can convert their plan to any other plan without any problems. Say a person secures a convertible life insurance plan for a period of 15 years and decides seven years in that they would prefer a whole life insurance plan or any other plan; they are allowed to convert to their choice of plan.

Yearly Renewable Term (YRT) Life Insurance: YRTs are insurance plans that are renewed annually. It makes the policy subject to changes on both the policyholder and insurer's side. 

When renewing a YRT, policies are adjusted with each renewal based on the health and age of the individual. Premiums go up as the policyholder ages. 

Individuals may get this plan if they do not wish to be locked into a long-term contract with the insurer. However, the increasing premiums with each renewal make this an unappealing choice.

Return Of Premium Term Insurance: This is a relatively new type of term life insurance plan. Unlike others, when the specified term for the policy expires and the policyholder is still alive, the insurer pays out the total premium paid to the individual.

A return of premium term insurance is the only term plan that features a savings component. As long as no claims are made for the duration of the policy, then the policyholder can claim all paid premiums at maturity.

Additional Types Of Life Insurance

The complexity of life and human existence makes it, so life insurance is hardly all-encompassing. While an individual could want life insurance that pays out a benefit to their beneficiaries in the event of their death, others could want a more nuanced policy like an accidental death or mortgage coverage. Here are other types of insurance that fall outside the perimeter of commonly offered policies.

Accidental Death And Dismemberment Insurance

This type of insurance only covers accidents. If a holder dies or loses a body part in the event of an accident, an AD&D will pay out the benefit to the insured or their beneficiaries.

Mortgage Life Insurance

Mortgage life insurance provides coverage for a mortgage taken out by the policyholder in the event of their death. An important feature of this policy is that the lender is the beneficiary, not the loved ones of the deceased.

Group Life Insurance

This is a type of insurance that is usually taken out by companies for employees' coverage. The company pays an agreed-upon premium for all of its staff. 

Group life insurance is usually offered by employers as a basic plan for free. But employees can decide to upgrade their policy and purchase supplemental life insurance if they wish.

Credit Life Insurance

When a policyholder dies, credit life insurance goes towards financing the loans left behind by the deceased. Like a mortgage life insurance, the lender receives the payout instead of the family.

Joint Life Insurance

A joint life insurance plan ties the policy to two lives. Policies like this are usually for spouses, and they can specify the conditions under which the policy's benefits get paid out.

First-to-die Vs Second-to-die Joint Life Insurance

Under a first-to-die policy, one party receives the death benefit when one policyholder dies. After the payout is completed, the policy is regarded as matured and no longer covers the surviving policyholder.

Under a second-to-die policy, the policy only pays out the benefits in the event of the death of both policyholders. In this case, when one policyholder dies, the policy remains valid until the surviving policyholder dies. Then the benefits are paid out to the beneficiaries specified in the policy. 

Factors That Can Affect Insurance Plans

Various factors can affect the insurance plans that an individual gets. These factors will also inadvertently affect the premium rates offered by the insurer. These include;

  • Age of the insured
  • Gender of the insured
  • Health history of the insured
  • The term length of the policy
  • Payout sum of the policy
  • Height and weight
  • Family history of the insured, including parents and siblings
  • Occupation and hobbies (Individuals with dangerous jobs or hobbies can attract higher premiums on their policies.)
  • Credit history
  • Criminal history
  • Driving record (Individuals with driving violations are subject to higher premiums due to being considered high-risk.)
  • History of nicotine, marijuana, or recreational drug use
  • History of substance abuse (Opioids, alcohol, etc.) 

How To Get a Life Insurance Policy

The first step in getting a life insurance policy is to get a quote from an insurer. It is advisable to contact different insurers and compare quotes to determine the best issuer for your needs. Once this step is complete, an application will be provided for the prospective policyholder to fill out.

The insurance agents will review the answers provided, and the applicant will be required to sign releases for various records. The most common of these is a release of the applicant's medical records. Sometimes the insurer will require the applicant to undergo insurance medical testing to determine their health status. These records will be reviewed by the insurer when considering the application for approval. 

Insurance policy providers also research the applicant as part of their due diligence. Insurers can dig into vehicle reports, past health and life insurance policies, and verification from a third party regarding the financial status of the applicant. 

After all the information is gathered, the insurer then reviews the policy and either approves the applicant or adjusts the policy based on their findings.

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