Understanding the Different Lines of Life Insurance Categories
Life insurance is something that people don’t like to think about, since considering it means contemplating your own mortality. It is important to have, however, and taking the time to find a suitable policy will give you the peace of mind that should something happen to you, your loved ones will be taken care of.
The COVID-19 pandemic has left many people considering their options when it comes to life insurance, highlighting exactly how quickly life, and the world, can change. If you’re wondering what your options are for life insurance and wondering about the difference between savings, annuities, and different policies, read on to learn more.
Life Insurance Categories Explained
If you’re contemplating life insurance, the most important thing to understand is that there are two core types of policy – term life insurance, and whole life insurance. Thre are many sub-categories of policy within those, but those are the two core categories.
Term vs Whole Life Insurance
Term life insurance is a form of life insurance that will last for a specific length of time, and that will expire at the end of that period. In contrast, whole life insurance is a permanent policy that will last until the day that you die. Term life insurance is the simplest and easiest to obtain, a variety of life insurance. You start making payments, and if you die before the term is up then the nominated beneficiary will receive the payment from the policy, either as a lump sum or a monthly payment. If you do not die before the end of the term, then the policy expires.
Term life insurance has a low monthly payment and a cash value for the policy. The length of the term varies, but if someone is relatively young when they take the policy out, the term could be as long as 30 years.
In contrast, whole life insurance is a permanent policy that does not expire. There is a death benefit that is awarded when the holder of the policy dies, but the policy does not expire. The amount that is paid out depends on how long you have had the policy since it accrues interest at a set rate over time. The longer the policy is held, the greater its value. In terms of cash versus payout amount, the cost of a whole life policy is much more expensive than that of a term policy. However, if the goal of your policy is to cover endowments or an estate plan, a whole life policy has the flexibility to do that.
Policies With More Flexibility
In addition to the two types listed above, there are some other policies that might be appealing. For example, a universal life insurance policy is a type of policy that allows you to change the premium and the death benefit amounts without having to stop the policy and take out a new one. You could even use the cash value to pay the premium, assuming that you have enough money currently in the cash value to do so. This means if you’ve been paying in for a long time and then need to skip payments for a while, perhaps because of a change in circumstances or some time off work, you could do so, and the accrued interest would take care of the payments for you.
If you want to increase the death benefit, or decrease it, you can do so. There may be fees or underwriting to consider, but you can still do it. The downside is that the interest that the policy earns is not fixed, it can change as the markets change.
Life Insurance and Savings
A lot of people use life insurance as a form of savings and borrow against the cash value of their policy for major expenses. In some ways, this is more appealing than taking money out of savings because it means that the savings can continue to earn interest. However, there may be early distribution fees if you choose to do this. In addition, if you do not repay the amount that was borrowed against the cash value of the policy, this could reduce any death benefit that is paid out to your loved ones. Very large debts may invalidate the policy. Therefore, it is important that you seek advice before using a life insurance policy as a ‘savings’ account. Some people opt to invest in a term policy, and then put the difference between a term and whole policy cost into a savings account.
Life Insurance as You Age
Many older people opt for annuities rather than traditional life insurance policies. Annuities are a policy that offers regular payouts upon maturity, but that helps to alleviate longevity concerns. An older person may worry about outliving their assets, but annuities offset that risk.
To put it simply, life insurance pays out when a person dies. Insurance companies ‘win’ if a person has a term life insurance policy and outlives it, but lose out if they have to pay out because the person dies. Annuities pay a fixed amount until the person dies, so insurance companies prefer to give them to people who have a higher risk of premature death. The insurance company loses out if the policyholder outlives their wealth.
As someone gets older, they may struggle to find affordable term life policies, because of the risk of them, statistically, dying before the term is up increases. In general, it is better to pick up a policy early. You can keep a whole life policy up to age 120, typically, as long as premiums are being paid. You can also use many whole life insurance policies to request accelerated benefits if you have a serious condition such as end-stage renal failure or invasive cancer. If you tap into those benefits, your beneficiaries would receive lower benefits upon your death, but the policy could provide you with much-needed short-term support during a difficult period of your life.
Investing in life insurance is a major decision. Speak to an insurance advisor to get advice about which policy would suit you best.