Do you know what type of life insurance is right for you? Why should you choose one or the other? You are in the right place, at Insurance Latino we advise you on everything you need to know to make the right decision, there are 2 types of Life Insurance:
Term: It is characterized by having validity, that is, a term date, which generally ranges from 10, 20, 30, 35, and up to 40 years.
Permanent: As its name indicates, this type of insurance is not valid and the insured amount will be paid when you have died.
All other types fall into these two categories, except for an accidental death and dismemberment policy, which is exclusive (can only be paid if you die in an accident).
Different Types of Life Insurance
- Term Life Insurance
- Universal Life Insurance
- Whole Life Insurance
- Indexed Universal Life Insurance
- Simplified Subscription
- Guaranteed acceptance
- Group Life Insurance
- Survival Life Insurance
- Accidental life insurance
Although their demand is not great in the market, there are some additional life insurance subtypes.
TERM (Temporary) VS. WHOLE
The most common question to ask yourself when buying a life insurance policy is how long you need it for.
Temporary life insurance is valid (10, 20, 30 years), instead
Whole life insurance does not expire and it ends until the day of your death.
But, since the term expires, it is significantly cheaper!
This type of term life insurance is most popular in the market due to the low cost of its premiums.
Understanding your need and adapting the type of life insurance policy is the best way to make a smart decision that can save you a significant sum of money.
Studies show that life insurance helps protect loved ones primarily by:
Your children’s university
Each of these is temporary obligations, although they may span several years.
Term life insurance offers coverage from one year to 30 or 40 years, during which time the insurance company will not be able to modify your premiums, of course as long as you keep your policy active.
It is probably the best (and cheapest) option for you most of the time.
WHY IS LIFETIME INSURANCE SO POPULAR?
The main reason, the price.
This type of life insurance is the way you will get the most out of your investment if you need a higher amount of coverage.
In fact, it is the most common type of life insurance in existence and is offered primarily through employer group life insurance plans across the country.
In addition to that it is very easy to understand since, in essence, there are only two elements:
The death benefit is the sum of money that the insurance company will pay your beneficiary when you die.
The premium is the amount of money that you pay month by month.
You pay the company your regular payment on time and the insurance company guarantees to pay the claim when they receive it.
Term policies may have additional clauses attached, which add different benefits, and may also become more permanent policies.
If we look at it, this type of life insurance has very few limitations such as the ability to qualify, the maximum coverage based on need (called insurable interest), and that has an inevitable end date.
ENTIRE LIFE INSURANCE
A whole life insurance policy; has very different conditions and characteristics and that are of interest to some people.
The most common reasons people don’t like it:
- The monthly premium is more expensive compared to term life insurance
- Its operation is more complex, which is more difficult to understand.
- It is not a product that easily adjusts to all needs
The cost, per thousand of coverage, is significantly higher than term life insurance because the insurance company knows it will pay one day.
Whole life insurance is also more complicated. Instead of just a premium payment and death benefit, there is a cash value component.
This cash value component earns interest and potentially dividends, and can even be affordable.
Lastly, due to the cost of these permanent life insurance policies, most consumers do not find that it meets their needs along with their budget.
If you’re still unsure, check out our information on term life insurance versus whole life insurance.
UNIVERSAL LIFE INSURANCE
What do you do if you need something more permanent than term life insurance, but don’t want to spend a large amount of money on whole life insurance?
A universal life insurance plan may be the right life insurance policy for you.
Perhaps the most flexible and customizable type of life insurance, a universal life insurance policy is a kind of hybrid between the term and the entire policy.
The main benefits of universal life insurance are:
- Long coverage duration (up to lifetime)
- Lower costs than whole life insurance.
- Flexible payment and death benefit options
- Ability to grow cash more aggressively
Universal life insurance policies can be customized to provide coverage for virtually any age. They can be built to last up to 80 years, 90 years, or even a lifetime.
They’re also a good type of permanent life insurance policy, especially when they have built-in guarantees, they are considered some of the best life insurance plans for seniors looking to get the most out of their money.
Sort of like whole life insurance, there is also a cash component.
It is generally used to:
- Compensation of premium payments later in life
- Temporarily stop premiums entirely
- Invest in indices or mutual funds
- Access through loans
Its ability to modify your premium payments, or even adjust the death benefit (if the life insurance policy allows it) makes it much easier to use.
You should be aware that there are fewer guarantees with a universal life insurance plan compared to whole life insurance.
In a whole life insurance contract, you are guaranteed a minimum death benefit, a minimum interest rate, and very little risk.
With the universal life insurance policy, they may not be guaranteed, and if you don’t have cash, your policy could collapse.
For those of you with an investment mindset, look for indexed universal life insurance policies that allow cash to move with market rates.
INDEXED UNIVERSAL LIFE INSURANCE
One of the newer types of life insurance available today is so-called indexed universal life insurance, or IUL for short.
It is one of the most complicated types of life insurance policies and it is only recommended to purchase it if you fully understand the policy.
An indexed universal life insurance policy is like a universal life insurance policy in regards to your death and cash growth benefit, but it provides additional flexibility for the owner with the cash portion.
The cash value within the life insurance policy can fall into two different accounts:
- Stock market index
- Fixed interest account
Generally, the stock index, or stock index, offered is a well-represented index, such as the S&P 500 or the like. The earnings, when left in the account, are tax-deferred, similar to an IRA or 401 (k).
However, there are upper limits on returns, so the life insurance policy may not earn as much as the index. Compensation is a floor, where you are guaranteed a minimum interest rate or minimum growth, which should help if returns are negative throughout the year.
It may seem like you get all the benefits of growth with little risk, but you should be careful with high premium costs later in life, which could reduce the cash value you have earned.
A full life insurance policy is safer, but an IUL may allow for additional growth over time, which is beyond the general interest of whole life insurance.
This is how IUL compares to whole life insurance.
LIFE INSURANCE WITH SIMPLIFIED SUBSCRIPTION
One of the most common ways that a life insurance company can assess your health in detail is to undergo an independent paramedical examination.
As they say within the industry, they like to know that you look as healthy on the inside as on the outside.
The results of this paramedical exam, which come from blood and urine tests, help you identify your risk, and this determines how much you pay for coverage.
But simplified life insurance coverage allows you to forego the medical exam. That is why it is known as an “unexamined” life insurance policy.
However, you may need to provide one or all of the following:
- Application and questionnaire
- Motor Vehicle Registration
- Report of the Office of Medical Information
- Checking the recipe database
- Financial checkup
Some operators may even require more information, depending on their subscription criteria.
A paramedic examination can be avoided at a small additional cost.
Because they don’t have access to the data they get from their blood and urine, they depend on less information, and less information is more risk.
More risk means higher premiums.
For the younger crowd, the difference in premiums is probably minimal. However, if you are middle-aged or older, the difference could be quite substantial.
If you are healthy and really looking for the cheapest life insurance policy, take the test and you will probably save some money.
LIFE INSURANCE WITH GUARANTEED ACCEPTANCE
As the name implies, guaranteed acceptance life insurance is one type for which you cannot be denied.
Known as final expense insurance, burial insurance, or funeral insurance, they are small, guaranteed acceptance policies, but they have even lower requirements for approval.
You just need to fill out a valid application and make your payments; it is now covered.
Of course, because the insurance company knows very little about you, expect to pay very high premiums and have little or no access to great death benefits.
It is not uncommon to see that guaranteed acceptance life insurance policies are limited to a range of just $ 5,000 to $ 25,000 in death benefit.
Plus, there is a big difference with a guaranteed policy compared to one in which you fully qualify – it may not get paid right away!
Many high-risk applicants buy this type of coverage because it is all they can be approved for. Because of this, there could be a 1 to 3-year waiting period to get all the benefits.
If the primary insured dies during this time, the insurance company can only pay a fraction of the death benefit or none, and simply return the premiums paid plus a small amount of interest.
These limitations, along with the high cost of insurance, make this the least desirable type of life insurance, although it is the only option for some.
GROUP LIFE INSURANCE
Many people take advantage of insurance through their workplace.
Health insurance is the most common, but disability insurance and group life insurance plans are also sometimes available.
A group life insurance option is a policy that is made available to an entire workplace, organization, or affiliation, all under one offer.
They come in many different forms, which vary based on the size of the workplace and its eligible employees. They are usually offered in a simplified or guaranteed format with little if any, subscription.
The two biggest variations are how much coverage you can take and who pays for it. Most of the time, you, the employee, pay the premium, but only if you choose to have coverage through your human resources department.
The amount for which you are eligible is regularly calculated in one of two ways:
- A maximum number multiplied by your annual salary.
- A maximum total coverage amount designated by the issuer
In both scenarios, there is a limit to how much you can get, and it’s limited by the plan, not how much you really need.
For this reason, even if it’s available through the workplace, you may need to find your own private life insurance plan outside of work to fill the gap.
NOTE: Not all life insurance is transferable if you leave the workplace. Otherwise, you lose coverage once you leave or are fired from employment.
Certain occupations or positions may also have different levels of benefits.
If you are active military or veteran, for example, your life insurance benefits are different.
Check with your workplace to see what’s available, and always compare the cost per thousand with that of a private insurer before deducting it from your paycheck. You can save by saving coverage yourself.
ACCIDENTAL DEATH AND DISmemberment INSURANCE (AD&D)
Technically speaking, AD&D is not life insurance. This is because you will not pay for all causes of death.
By contrast, accidental death and dismemberment insurance only pay a benefit if you are seriously injured or die from an accident. These policies will pay in addition to any other life insurance you have when it is an accident.
Unlike the life insurance policies listed above, if you die of natural causes, illness, or the like, this type of policy will pay nothing to your beneficiaries.
However, this limited payment structure makes it extremely affordable, as only a very small percentage of the population dies in any form of accident each year.
You can buy a separate policy or even add it as an additional clause to your current life insurance.
Just know that it is not a direct replacement for any other type of life insurance.
SURVIVAL LIFE INSURANCE
The survival life insurance policy is one of the most unique types of policies because it is linked to two lives, not one.
Survival life insurance policies can be universal or comprehensive, but always permanent. The death benefit only pays after both policyholders are deceased, giving way to their nickname, second-to-die life insurance.
Because the death benefit is delayed until both have passed, the cost per thousand of coverage is less since the insurance company can mitigate its risk. This should only be used in certain circumstances, described below.
WHAT TYPE OF LIFE INSURANCE IS THE BEST?
Most consumers buy term life insurance.
It is the cheapest, it is simple and it can be adapted to practically any size of obligation from now to 40 years.
Of course, your situation, your need, and your goals will ultimately determine which type of life insurance is best suited.
Putting your need first and matching the type of life insurance policy to the need is the most effective way to choose, and could end up saving you a LOT of money in the long run.
We will start by discussing possible needs and explain the different types of life insurance that match.
This will also help you narrow down the best life insurance companies to locate your business in, as each has its own strengths and weaknesses.
Then we will close the circle and break down the different types of life insurance policies that best suit certain needs (such as mortgages, income replacement, etc.).
Are we clear? Good.
So First, What Do You Really Need?
These three questions may seem basic, but they are really the only questions you should answer to focus on which type of life insurance is most appropriate:
- What do you really need to cover?
- How long do you need to cover it?
- Are you healthy?
With life insurance, defining whether you need to replace income, cover a mortgage, or collateralize a loan will all force you to adjust your possible type of policy to make sure it meets the right purpose and pay the right premium.
Duration is also important.
Do you need a term life insurance policy or a permanent life insurance policy to help you liquidate your estate regardless of age you die?
And finally, your health is also important in choosing a type of life insurance policy.
Just because you want that insurance doesn’t mean you can have it. It needs to be approved first.
Types of Life Insurance Policies Broken Down by Primary Necessity
There are many different reasons why someone might consider buying life insurance. It is not one of those purchases that you wake up one day thinking: “I would love to get life insurance today!”
Some circumstances generally make a person’s mind think about it.
A life-altering event, a mandatory request for coverage, or a large purchase using debt for leverage are all possible situations, and each is a good reason to start looking for a life insurance policy.
But coming to the conclusion of why you need it isn’t always so clearly written.
Here are some things it covers better:
- Replacement of dependent income
- Long-term debt obligations
- Burial expenses
- Purchase/sale agreements
- Small Business Loan Guarantee
- Business continuation plans
- Advanced asset plans
- Charitable donations
- Divorce Decree Requirements
- and more…
Let’s start from the top and look at each one briefly.
Refund of Payments
Type: Temporary or Temporary with Premium Refund
Generally, one of the biggest needs to cover is the replacement of your dependent’s income. If you weren’t here to work and earn income, how much money would your family or dependents immediately need to continue your lifestyle as if you were still here?
This is covering human capital, or your future ability to earn.
For younger people, they have more years of work, so they tend to have a greater potential loss of income when they spend early compared to their older counterparts who are about to retire. The general rule of thumb to replace income is 7 to 12 years of your current income.
Not always, but sometimes, when we help people to start looking at life insurance rates to compare, we generally just settle for 10x as it’s an easy multiple.
Each person will have a different need here, and insurance will also have different limits on what they will offer based on their age and income; the younger the applicant, the greater the allowable factor.
Even those who don’t work may consider something for this category.
As an example, if you are a stay-at-home mom, replacing what you do with children at home to allow your spouse to continue working would cost you a lot. While an employer may not pay you, it adds significant value to the family, and there would be a financial reason to have insurance in your life if something happened to you.
A temporary premium return life insurance policy allows you to get your payments back, as long as you pay until the end. However, if you don’t, you may lose your paid premiums.
Type: Term / Universal
The second most common need to cover with a life insurance policy is for the debts you owe. There are certain types of debts that would disappear with your death, called non-transferable debts, but most debts will either be paid by your estate or left to a secondary person, such as a spouse.
A mortgage is the best example. If you are currently paying off a mortgage, how much would it cost to pay the rest in full or at least set aside enough to make the payments for some time?
Either line of thinking is fine, but consider taxes, insurance, or other things that could change over time.
If you have debt that will definitely end at some point, matching the length of the term with this could save you money. If you bought your home with a 15-year mortgage instead of a 30-year mortgage, you could dramatically cut your premiums by getting just a 15-year policy.
Type: Universal / Whole
Most people consider the cost of a funeral or cremation but tend to forget other expenses at the end of life. Burial, funeral, or final expense insurance covers this.
The typical funeral may cost only $ 7,000-10,000, but there are other bills as well, such as potential attorney fees, remaining medical bills, and more.
Unfortunately, medical bills can be extremely expensive when someone goes terminal or struggles with a chronic illness, so trying to account for those bills is a necessity, albeit a difficult one.
At the very least, leave enough to help your dependents finance the debt for a specified period.
Purchase / sale agreements
Type: Term / Universal
A buy/sell agreement is one in which two or more business partners plan what to do with the business in the event that one or more of the partners passes before the business is properly delivered or dissolved.
In this matter, it helps prevent the surviving couple from having sudden business deals with their partner’s spouse or heirs.
Choosing the type of life insurance policy here generally depends on the nature of the business, the business model, and the way the company is already structured and established by law.
It is recommended that you work with both your insurance agent and a legal professional to ensure that it is written and configured correctly. How the life insurance policy is paid may also differ from a traditional individual policy.
The vast majority of all small businesses are underfinanced or financed by OPM (Other People’s Money).
For loans, especially in the form of an SBA loan, the lender is likely to require you to have life insurance, with the death benefit assigned to the institution, to be approved.
Term life insurance is the best solution for a couple of reasons.
First, the terms of your loan will have an end date, so matching the duration of your life insurance policy with the duration of the loan can dramatically decrease premiums; not many lending institutions will offer ultra-long loans, depending on the business industry.
Second, it is a good idea to keep your business insurance separate from staff, so try not to group them. But in some cases, it may be cheaper to buy life insurance at a certain death benefit amount for price discounts and list the amount above the principal family loan amount.
Finally, consider an unexamined life insurance policy if your loan date is fast approaching and you are not yet approved for coverage.
Type: Universal / Integer
As a business grows, the owner or owners may, at some point, decide that they want to continue the business after approval, whether for family members or not.
To do this, life insurance can be used as a tool to change property and assets and provide an immediate distribution of funds when necessary.
Because there may be an undetermined amount of time that the current owner will remain as a partner or shareholder, it is best to use permanent coverage to avoid any chance that life insurance may not have the opportunity to go into effect as intended.
This is a more advanced planning situation, so you may want to consider discussing all possibilities with legal and financial professionals.
Type: Universal / Whole
One of the best uses for life insurance in estate planning. Because there are considerable assets, there is no better way to leverage dollars within an inheritance to be much, much larger at the time of inheritance liquidation.
Estate planning is a complex planning procedure, but in essence, a large estate will be subject to estate tax if it is large enough.
Exemptions have a limit, so using life insurance to offset those taxes allows for more liquidity and more streamlined distribution methods for heirs.
The idea of estate planning is to try to pass on as much value as possible to the next generation, so it fits perfectly in that life insurance is dollar for dollar, the main way to turn 1 dollar into many at death.
More complex plans, such as a dollar-split life insurance agreement, may also have additional benefits, while simultaneously having current benefits for both parties.
Type: Universal / Whole
Charitable giving plans could act similarly to heritage, except that leverage is being used to take a small amount now and combine it into something larger as a final gift for a charity, partnership, fraternity, or university.
The basic idea is to forgo giving annually now and put those dollars in life insurance as premiums to increase the power of giving when approved. The policy may not only grant a greater amount than you entered, but it is transmitted without taxes since the death benefit of the life insurance policy is tax-free by nature.
Consider using a legal or tax professional to make sure the settlement is set up correctly so they can still be deducted.
Type: Term / Universal
Beyond the aforementioned buy/sell agreement, there are several other cases where a key person has been identified within an organization that requires small life insurance coverage.
The reason is that this person is an integral part of the function of a company, and a loss of this person would result in a tangible loss in income.
Banks and corporations do this quite frequently, and this allows them to not only continue their business temporarily with a way to recover lost funds immediately but also to hire a replacement for the key person previously employed.
Another type of plan for which this could offer a solution is an executive bonus plan.
By law, some spouses may be required to have life insurance for the benefit of the other after the divorce has been resolved.
This can be for a couple of reasons, but the most common thing is to protect child support and alimony payments when necessary. If the spouse who owes child support dies, the other spouse would be without future payments.
But, if life insurance exists, it could provide immediate cash to replace the future cash flows that would have been received if the spouse had lived and continued to pay.
Remember, the key to choosing from the many types of life insurance is to choose out of necessity.
Whatever it is, match the death benefit amount, duration, and beneficiary to serve the right purpose, and you’ll save time and hassle of navigating through less-favorable life insurance policies.