Life Insurance

Term Life | Whole Life | Final Expense

Term life insurance is a type of life insurance that guarantees payment of a stated death benefit if the covered person dies during a specified term. Once the term expires, the policyholder can either renew it for another term, convert the policy to permanent coverage, or allow the policy to terminate.

How Term Life Insurance Works

Insurance companies determine premiums based on the value of the policy (the payout amount) as well as your age, gender, and health. In some cases, a medical exam may be required. The insurance company may also look into your driving record, current medications, smoking status, occupation, hobbies, and family medical history.

The insurer will pay the face value of the policy to your beneficiaries if you die during the term of the policy. This cash benefit, which is not taxable in most cases, may be used by beneficiaries to settle your outstanding debt or for their own benefit. If the policy expires before your death, there is no payout. Term life policies have no value other than the guaranteed death benefit. There is no savings component as found in a whole life insurance product.

Term life is usually the least costly life insurance available. Most term life insurance policies expire before paying a death benefit, lowering the overall risk to the insurer than that of a permanent life policy. This reduced risk allows insurers to pass savings to the customers in the form of lower premiums. When you consider the amount of coverage you can get for your premium dollars, term life insurance tends to be the least expensive option for life insurance.

Types of Term Life Insurance

Level term, or level-premium, policies provide coverage for a specified period ranging from 10 to 30 years. The death benefit and premiums are fixed for the term of the policy. Because actuaries must account for the increasing costs of insurance over the life of the policy’s effectiveness, the premium is comparatively higher than yearly renewable term life insurance.

Yearly renewable term (YRT) policies have no specified term, but can be renewed each year without providing evidence of insurability. The premiums increase from year to year as the insured person ages. Although there is no specified term, premiums can become prohibitively expensive as individuals age, making the policy an unattractive choice for many.

Convertible term life insurance is a term life policy that includes a conversion rider. The rider guarantees the right to convert an in-force term policy—or one about to expire—to a permanent plan without going through underwriting or proving insurability. The conversion rider should allow you to convert to any permanent policy the insurance company offers with no restrictions.

Decreasing term policies have a death benefit that declines each year, according to a predetermined schedule. The policyholder pays a fixed, level premium for the duration of the policy.

Term life insurance is attractive to young people with children. Parents may obtain large amounts of coverage for reasonably low costs. Upon the death of a parent, the significant benefit can replace lost income. Term policies are also well-suited for people who temporarily need specific amounts of life insurance. For example, the policyholder may calculate that by the time the policy expires, their beneficiaries will no longer need financial protection.

Whole life insurance provides coverage for the life of the insured. In addition to providing a death benefit, whole life also contains a savings component where cash value may accumulate. These policies are also known as permanent or traditional life insurance.

How Whole Life Insurance Works

The most common of life insurance products, whole life insurance, guarantees payment of a death benefit to beneficiaries in exchange for level premium payments. The policy includes a savings portion, called the cash value, alongside the death benefit. In the savings component, interest may accumulate on a tax-deferred basis. Growing cash value is an essential component of whole life insurance. Whole life insurance lasts for a policyholder’s lifetime, as opposed to term life insurance, which is for a specific amount of years. It is paid out to a beneficiary or beneficiaries upon the policyholder’s death, provided that the premium payments were maintained. The savings component can be invested, and the policyholder can access the cash while alive, by either withdrawing or borrowing against it, when needed.

Differences between Term and Whole Life

The main differences between a term life insurance policy and a permanent insurance policy are the duration of the policy, the accumulation of cash value, and the cost. The right choice for you will depend on your needs. Some of the things to be considered include the cost of premiums, availability of coverage, investment value, and other factors. There is no one-size-fits-all answer to the term versus permanent insurance debate.

Final expense insurance, also known as burial insurance, is designed to cover the bills that your loved ones will face after your death. These costs could include medical bills and funeral expenses.. Final expense insurance can also help cover outstanding debts, probate fees, and other remaining expenses. This type of life insurance also allows you to choose your beneficiary. The final expense benefit goes straight to the beneficiary you choose. Final expense insurance is a whole life policy that is quickly accessible, without being subject to waiting periods surrounding the probate process. These policies generally pay out within 72 hours of the insured’s passing.

Value over Time

This type of policy can increase in value over time. It works like a savings account, with the balance going up as you pay in. The price of your initial premium will be higher the older you are when you buy it, but your premium amount will not go up as you age.

Allows Beneficiaries

Final expense insurance policies allow you to select a beneficiary, which means you can choose an agent who’s legally responsible for the allocation of benefits. Commonly, people choose a partner or relative to act as a beneficiary to ensure instructions are followed and funds are properly distributed.

No Medical Exams

You often won’t be required to take a medical exam to receive coverage, and your policy won’t be canceled due to changes in health. Final expense insurance is available to those in poor health with graded benefits, meaning only a portion of your policy will be available for the first few years of coverage. Your entire policy does not have to be paid all at once. Term policy payments can be arranged to be paid monthly or yearly.

Borrow Against Policy

You can sometimes borrow against the tax-deferred dividend value of your final expense policy. This means that in addition to preparing for your family’s financial future, you may also have an accessible line of credit in case of an emergency.

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