Which Type Of Life Insurance Suits You?

by Shane Flait, ©2008

The ultimate reason for buying life insurance is for paying a benefit (a $ figure) to a beneficiary when you die. The purpose of that payout benefit varies with your situation.

Life insurance as well as health insurance, is priced by the insurance companies based on your health. Life insurance companies expect you to live statistically so many years. Health insurance companies assume you have normal health – i.e. you don’t possess some serious disease requiring a lot of medical care. Because of this, your acceptance by the insurance company depends on the condition of your health.

The types of insurance available may offer additional living benefits such as a savings vehicle. Choosing the policy type that best addresses your needs is the name of the game. Here are the classic policy types to choose from.

Term insurance:  It offers no savings component to it which leaves no ‘cash value’ associated with the policy. Therefore its premiums (i.e. the payment you make to own the policy) covers only the risk of death during that year. I.e. you’re paying for what is called ‘pure’ insurance.  Many insurance companies offer level premium term insurance. Premiums may remain level (i.e. constant) for a period of 5, 10, 15, 20, 25 or even 30 years. These policies are inexpensive and can provide relatively long term coverage.

Some level premium term policies contain a guarantee of level premiums, while other don’t. Without a guarantee, the insurance company can surprise you by raising your premiums (the amount you must pay to keep the policy in force), even during the time you expected your premiums to remain level. Make sure you understand the terms of your policy.

Whole Life Insurance: This is a form of permanent insurance because it’s designed to remain in effect throughout one's lifetime. Generally, the premiums for this type of policy remain the same throughout the life of the insured. During the early years of the policy, premiums are much higher than those of term insurance policies. That’s because these policies develop a cash value (i.e. it has a savings component) which the policy owner can access through surrenders or policy loans.

Return of premium term insurance (ROP): This is new type of coverage that generally combines low, term-like premiums with a guaranteed refund of the premiums paid during the level term period assuming the insured is still living at the end of the level term. They are often significantly less expensive than permanent types of insurance. But, like many permanent plans, they may still offer cash surrender values if the insured doesn’t die.

Universal Life Insurance: It’s also a form a permanent insurance but differs from Whole Life because it delineates and itemizes the protection element, the expense element, and the cash value element. This adds more policy flexibility for the policy owner to modify the face amount or the premium in response to changing needs and circumstances.

A Survivor or Second to Die insurance policy: This is offered either as Universal Life or Whole Life and pays a death benefit at the later death of two insured individuals, usually a husband and wife. That way it can pay estate taxes when they occur – at the second person’s death. Most individuals arrange to pay little or no estate taxes at the death of the first person because of the unlimited marital deduction in the estate tax. This coverage is widely used because it is generally much less expensive than individual coverage on either spouse.

Shane Flait is a writer and educator. Get more info at www.EasyRetirementKnowHow.com