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Types Of Life Insurance Policies

The COVID-19 pandemic has been a wake-up call for many people to take a closer look at their personal finances, including life insurance. Two-thirds of Americans are re-evaluating their finances because of the pandemic, according to a July 2020 study by Life Happens, an industry-funded educational group.

Survey respondents said the pandemic has changed both family conversations and their behaviors regarding finances. They’re now less likely to avoid talking about finances at the dinner table. The top dinner table table conversations, according to the Life Happens survey, are:

Wills and inheritance: 33%

Current health issues and concerns: 32%

Life insurance coverage: 30%

Current financial status: 29%

Emergency savings: 27%

Americans don’t believe they’ll be comfortable with their financial situation for another 8.5 months, on average, according to the survey. And 66% believe the pandemic has helped them to better understand life insurance.

Whether the pandemic or other reasons have spurred you to buy life insurance, it’s always a good time to shop. Waiting only leads to higher quotes, as you get older and potentially develop health conditions that will affect the rates you’re offered.

Getting Started

When you start looking for life insurance, you’ll face two main decisions right away: What type of life insurance is best for me? And how much life insurance do I need?

As you get life insurance options and quotes, you’ll likely navigate toward a type and coverage amount that’s in line with how much you want to pay.

To get you started on your search, here’s an overview of types of life insurance and the main points to know for each.

Term life insurance

Whole life insurance

Universal life insurance

Burial insurance/funeral insurance

Survivorship life insurance/joint life insurance

Mortgage life insurance

Credit life insurance

Group life insurance

Term Life Insurance

The basics: Term life insurance insurance has a specific end date of coverage. Choices of coverage lengths are generally 5, 10, 15, 25 or 30 years. It’s the cheapest way to buy life insurance because you’re buying only insurance coverage, for a finite period, and not paying for a cash value component within the policy.

Who is it good for: Term life insurance is ideal for people who want life insurance coverage for a specific debt or situation. For example, some people buy it to cover their working years as income replacement for their family. Some people buy term life to cover the years of a mortgage or other large debt.

Downside: You might outlive a term life policy. If you still need coverage after it expires, you could find new life insurance to be extremely pricey based on your age and any health conditions you’ve developed.

Whole Life Insurance

The basics: Whole life insurance can provide coverage for the duration of your life. An account within the policy builds cash value over time by using part of your premium payment and adding interest. A policy will have built-in guarantees that the premium will not increase, the death benefit remains the same, and the cash value will earn a fixed rate of return.

Who is it good for: Whole life is suited for people who want lifelong coverage and are willing to pay for the guarantees provided by the policy.

Downside: Because of the guaranteed features, whole life insurance is one of the more expensive ways to buy life insurance.

Universal Life Insurance

The basics: Universal life insurance (UL) can be hard to understand because there are a few varieties and with very different features. The common element is that universal life can provide lifelong coverage. It can be cheaper than whole life insurance because it generally doesn’t offer the same guarantees.

With some forms of universal life you can vary premium payments amounts and rejigger the death benefit amount, within certain limits. UL policies often have a cash value component.

Who is it good for: Universal life can be good for someone looking for lifelong coverage. Some varieties of UL are suited for people who want to tie their cash value gains to market performance (indexed and variable universal life insurance).

Downsides: If cash value is your main interest, not all UL policies guarantee you’ll make gains. And if you’re interested in flexible premiums payments, you have to stay on top of your policy’s status to make sure that the policy’s fees and charges don’t deplete your cash value and cause it to lapse. Understand what’s guaranteed within a UL policy and what isn’t.

Burial & Funeral Insurance

The basics: You may see this kind of policy called burial, funeral or final expense insurance. No matter the name, it’s usually a small whole life insurance policy that’s intended to pay only for funeral costs and other final expenses. It’s often offered as a policy that you can’t be turned down for and that doesn’t require a medical exam.

Who is it good for: These types of policies are generally for people in poor health who don’t have other life insurance options and who need insurance for funeral expenses.

Downsides: Burial insurance policies are expensive, based on the amount of coverage you get. They also have a safeguard for the life insurance company: Your beneficiaries won’t get the full death benefit if you pass away within two or three years after buying the policy.

Check the policy’s timeline for these “graded death benefits.” Your beneficiaries might receive only a refund of the premiums you paid in, plus some interest.

Survivorship Life Insurance

The basics: These joint life insurance policies ensure two people under one policy, such as a husband and wife. The payout to beneficiaries is made when both have passed away. You may see them called second-to-die life insurance, but for understandable reasons the industry is moving away from this name.

Survivorship life insurance can be less expensive than buying two separate life insurance policies, especially if one of the people has health issues.

Who is it good for: These policies are beneficial in estate planning when the life insurance money is not needed by a beneficiary until both of the insured people have passed away. Survivorship life insurance might be used to fund a trust, for example. It’s also suited for high net worth couples who want to provide money to heirs for estate taxes. Or it could be used by a couple to provide a donation to charity.

Downside: If two spouses are insured and one would suffer financially if the other passed away, this is not the right policy type. The surviving spouse does not receive any life insurance benefits. The payout is only made when both have passed away.

Mortgage Life Insurance

The basics: Mortgage life insurance is designed to cover only the balance of a mortgage and nothing else. This policy type is different from the life insurance types above in two major ways. First, the death benefit is paid to the mortgage lender, not a beneficiary that you choose. Second, the payout is the balance of the mortgage, or partial balance if that’s what you insured.

Who is it good for: Mortgage life insurance is intended for people who are primarily concerned about their family being burdened by the mortgage if they passed away. It can also be appealing to someone who doesn’t want to take a medical exam to get life insurance.

Downside: This type of policy won’t provide financial flexibility for your family.

If you’re looking for life insurance to cover a mortgage or other debts, you’re better off with term life insurance. You can choose the term length and amount, and provide more than just mortgage money to your family. Your family can use a payout for any purpose. They may decide to use the money elsewhere.

Credit Life Insurance

The basics: Like mortgage life insurance, credit life insurance covers a specific debt. When you take out a loan you might be offered credit life insurance. The payments can usually be rolled into your loan payments. The life insurance payout is the balance of the debt and it’s paid to the lender, not your family.

Who is it good for: If you’re concerned about how your family would pay a certain debt if you passed away, credit life insurance might look appealing and convenient. It can also be attractive because there’s no medical exam required to qualify.

Downside: Credit life insurance is very narrow and doesn’t allow financial flexibility in the future. You’re probably better off with term life insurance, which you can use to cover many concerns, from debt to income replacement to funeral expenses. A broader policy like term life will give your family more financial options if you pass away.

Supplemental Life Insurance

The basics: The life insurance you may have through work is supplemental life insurance, also known as group life insurance. It sets rates based on the group, not the individual.

Who is it good for: Because usually it’s free or inexpensive, group life insurance is a good value. It’s good as supplementary coverage to your own individual life insurance policy.

Downside: If you lose the job you generally lose the life insurance, too. That’s why it’s best to have your own life insurance that’s not tied to the workplace. Plus, on your own you can buy higher amounts of insurance.

Information reposted from Amy Danise, Forbes Advisor

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