Life Insurance

6 Types Of Life Insurance: Pros & Cons

When you are looking for life insurance, you’ll quickly realize that there are many options available. While having options is good, it also means that you must first understand each option before choosing the kind of life insurance that best suits your needs. 

As you compare life insurance alternatives and prices, you’ll probably steer toward a type and level of coverage that fits within your budget. Here’s an overview of the many forms of life insurance and the key details you should be aware of for each to help you get started on your search.

 

1. Whole Life Insurance 

Whole life insurance, usually referred to as traditional life insurance, offers continuous death benefit protection for the duration of the insured’s life. Whole life insurance has a savings feature where cash value may build up in addition to paying a death benefit.

One sort of permanent life insurance is a whole life insurance policy. Variable universal life, indexed universal life, and universal life are other terms. The earliest type of life insurance was whole life, but as there are other varieties of permanent life, whole life is not always synonymous with permanent life insurance.

Pros 

  • Lifelong protection
  • Premiums are fixed.
  • The death benefit won’t be reduced
  • builds assured tax-deferred cash value
  • If purchased through a mutual insurer, may pay dividends.
  • It’s one of the most basic types of long-term insurance

Cons 

  • Costs are significantly higher than for term life.
  • It’s best to enroll when you’re younger to get lower premiums.
  • As your life evolves, your protection requirements might as well.
  • In comparison to certain other permanent plans, the cash value may increase more slowly.
  • It requires paying more in premiums than term
  • Interest is charged on loans secured by the insurance policy.
  • On money removed from the policy, you might have to pay taxes.
  • More complicated than term life

 

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2. Term Life Insurance 

Term life insurance, commonly referred to as pure life insurance, is a type of death benefit that pays the policyholder’s heirs over a predetermined period.

The policyholder has three options after the term has ended: they can choose to convert their term life insurance policy to permanent coverage, renew it for another term, or let it lapse.

Pros

  • Term life insurance ensures that if the insured person passes away during the policy’s defined term, a stipulated death benefit will be paid to the insured’s beneficiaries.
  • Other than the guaranteed death payout, these policies are worthless and lack the savings element that whole life insurance products include
  • Age, health, and life expectancy are all factors that affect the cost of term life insurance.
  • It can be possible to convert term life insurance to whole life insurance, depending on the insurer.
  • Term life insurance policies with terms of 10, 15, or 20 years are available.

Cons 

  • Term life insurance only provides short-term protection, so it’s not necessarily the ideal choice for everyone. Term life insurance might not be the ideal option for you if you require permanent life insurance for reasons like paying for funeral costs or raising a kid with special needs into maturity.
  • Term life does not accrue cash value; thus, there is no savings account to draw from or borrow from. If you terminate a term policy, you won’t receive any money back unless you switch to a more expensive policy with a premium benefit return.

 

3. Universal Life Insurance (UL) 

Universal life insurance is a sort of permanent life insurance, whereas term life insurance is designed to last for a set number of years, such as 20 years. If you continue paying premiums, universal life insurance remains in force until the end of your life. Some universal life insurance policies also include a cash value element. You can withdraw money from the cash value or borrow it. The insurance provider will deduct any withdrawals or unpaid debts from the death benefit payment made to your beneficiaries after you pass away. However, for some buyers, retrieving the cash value is more crucial than a future payout in full to beneficiaries.

Pros

  • You may take out loans from your cash value.
  • It exists for all of your life.
  • It offers both a cash value account and a death benefit.

Cons

  • Cash value component withdrawals are taxed.
  • The insurer preserves the cash worth of the account once a policyholder passes away.
  • The policy loan collected must be repaid with interest.

 

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4. Burial Insurance/Funeral Insurance 

Burial or funeral life insurance, also known as final expense life insurance, is a useful approach to feeling more secure knowing that you won’t leave any unfinished business after your passing. You don’t want to leave behind debt that will burden your loved ones. It is normal to feel as though there is a need to safeguard your loved ones once you are no longer there to care for them since you know that death is an eventual truth.

There is a solution to assist in putting an end to pointless anxiety and worries. You can take steps to calm your mind rather than adding to your stress, worry, and lack of sleep. Make the necessary preparations for your family and find calm by planning. Investing in funeral or burial life insurance may be all you require to feel at ease.

Your survivors will continue to worry about the costs of daily living as they live without you. You can only support by purchasing a burial or funeral life insurance policy, which will enable you to contribute financially. The average price for a funeral in 2021, including viewing, burial, and vault, was $9,420, according to the National Funeral Directors Association.

Pros 

  • Compared to a competent prepaid funeral plan, you can set away less money, but the benefits will also be significantly less.
  • As with prepaid plans, no medical examination is necessary, but the insurance plan will pay out in full after an introductory period, which is typically two years. A monthly paid life insurance policy may therefore be more cost-effective than a monthly pre-paid burial plan if you pass away in the first few years. This kind of plan could therefore be a good deal if you are in really poor health and pretty certain to pass away in more than 2 years but under, say, 6 years.

Cons 

  • In the “moratorium” period, which is normally 2 years, only accidental death insurance usually applies. Some businesses would reimburse you for what you paid in full, plus interest, if you were to pass away through an accident or of your own.
  • Most funeral insurance policies are “non-profit whole of life,” or insurance that is not subject to Financial Conduct Authority regulation. They never have any value in cash. This implies that if you skip a few premium payments due to illness and subsequently pass away, your policy won’t pay you a dime. The more time you have invested, the more money you will lose. The situation is reversed with prepaid plans.
  • With insurance, you run the risk of contributing more than your family will get for your funeral. If the insurance is still in effect when you pass away, some insurers “generously” promise to pay you all of your premiums as a death benefit. In essence, you have given them a loan for up to 30 years without charging interest.

 

SEE ALSO:  Term Life Insurance: Meaning, How It Works, Pros & Cons

5. Survivorship Life Insurance/Joint Life Insurance 

Technically speaking, a survivorship policy is a type of combined life insurance. A joint life policy, which typically takes the form of joint whole life insurance or joint universal life insurance, is a single policy that provides coverage for many people. Two people can be covered by a single policy of survivorship life insurance. These plans also referred to as second-to-die joint life insurance, only pay out a death benefit after the demise of both policyholders. Typically, two distinct permanent plans cost more than one survivorship life insurance policy. If you wish to leave anything for your heirs, children who will be reliant on you forever, or even a beloved charity, it can be useful in estate planning. While married couples frequently obtain this insurance, joint policyholders don’t need to be married.

Pros 

  • The death benefit cannot be paid out until after the passing of both policyholders, although the surviving spouse may borrow against the cash value of the policy if necessary.
  • If you and your spouse have a long-term dependency, you can use a survivorship policy to support them after your passing.
  • To leave money and assets behind and possibly take advantage of tax benefits, a survivorship life insurance policy can be helpful in estate planning. For more information on how survivorship life insurance affects taxes, speak with a tax advisor.

Cons 

  • You will need to purchase separate life insurance policies or a first-to-die joint life policy if you want to utilize life insurance to support your partner after your death because survivorship policies need both insureds to die before making a payout.
  • In the event of a divorce or other significant life changes, updating survivorship arrangements might be challenging. When looking for a survivorship policy, think about inquiring as to whether it will be feasible to divide the policy in such circumstances.

 

SEE ALSO:  Universal Life Insurance (UL): Meaning, How It Works, Pros & Cons

6. Mortgage Life Insurance 

Mortgage life insurance commonly referred to as mortgage protection insurance is a type of life insurance that, in the event of your death, settles your mortgage debt. Although this policy can prevent your family from losing their house, it isn’t always the ideal choice for life insurance.

Your loved ones won’t receive a death benefit if you pass away during the policy’s term because mortgage life insurance names your mortgage lender as its beneficiary. Instead, the lender pays down the remainder of your mortgage using the death benefit from your mortgage protection insurance. The premiums for a life insurance policy that offers mortgage protection stay the same during the policy, but the value of the policy goes down as your mortgage balance does.

Pros 

  • By purchasing mortgage life insurance, you and your family may rest easy knowing that the mortgage will be paid off. That might also be the case if you purchase other types of insurance and specify that the money should go toward paying off the mortgage, whereas mortgage life insurance payouts are paid out to the mortgage lender.
  • Typically, medical exams and health questions are not necessary for mortgage life insurance. Mortgage life can be an alternative to regular life insurance for persons with health issues since it doesn’t price life insurance based on health.

Cons 

  • The mortgage firm is the policy’s beneficiary, thus beneficiaries cannot use death benefits for any other purpose.
  • Mortgage life insurance policies typically cost more than term life insurance policies for the amount of coverage you receive because they do not price based on your health. A term life insurance policy will be more valuable to you if you are normally in good health.
  • Mortgage life insurance typically pays out based on the amount owed on your mortgage. However, your premium does not change.

 

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Wrapping Up 

Regardless of the type of coverage you purchase, be sure to do it from an established, financially stable insurer. After all, one of the key advantages of obtaining life insurance is that it contributes to bringing some amount of predictability in a constantly changing environment. Financial strength scores are an unbiased way to ensure that the business will be around for your family for many years to come.

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