People get life insurance to ensure their loved ones are covered in the event of their death. Despite how common life insurance is, it’s surprising to see how many people don’t know much about it other than the death benefit. More comes into play when getting a life policy than meets the eye, especially when it’s part of an employee benefit package. If you plan on offering life insurance as a benefit, you need to know a couple of things. Here are the various types of life insurance policies and terminology you need to know.
Before you know the differences in life policies, it’s in your best interest to learn more about the terminology that comes with them. Some terms such as beneficiary and dividend are pretty self-explanatory. Here are the more advanced terms and what they mean:
- Cash Surrender Value – This refers to the amount of money you can receive if a policyholder decides to terminate their policy willingly. Coverages such as whole and term can have a cash surrender value.
- Standard Risk – This refers to what can be considered the qualifications to get life insurance. Anyone can apply for life insurance, but the premiums are determined based on their age and general health.
- Underwriter – This is the person who reviews applicant forms to determine how much the premiums should be.
Types of Life Insurance
Life insurance isn’t just one single policy. There are multiple types of this insurance you can get. But before we get into them, we need to address that not all of these policies are for everyone. Some of them are a bit niche and require specific scenarios to be of any use to you. Here are the types of life insurance you can buy.
This is the most commonly purchased and most effective type of policy. Whole, or permanent, life insurance is what goes into effect after the holder dies. Despite the advantages this policy gives you, you need to pay off the premiums, which is actually easy to do. You don’t have to worry about fluctuating premiums as they will always remain the same throughout their lifetime. Furthermore, the overall cash value builds up as the years go by, so getting this policy at a young age is not a bad idea. You can even choose to sell your whole life insurance policy through a life settlement.
A life settlement is a process similar to giving a policy back to the insurance company. But rather than the company themselves, you’re selling it to a third-party who can pay you more than what the policy is worth in exchange for becoming the new beneficiary. You can look up a guide on how to sell your life insurance policy to learn more.
Term life insurance is essentially the counterpart of permanent coverage. Instead of lasting an entire lifetime, a term policyholder is given a set number of years, which can be up to 30. You may be wondering the point of this coverage when you can get a whole policy. The thing with term coverage is that the overall value can go all the way up into the millions range. As impressive as that sounds, however, there’s a catch. The overall value of the policy decreases over time rather than increases like permanent coverage. But similar to a permanent policy, the premiums don’t change between payments.
There are two forms of universal life insurance: guaranteed and indexed. Guaranteed universal insurance is where the death benefit is guaranteed when the holder dies at a certain age and has no changing premiums. Having a guaranteed benefit is a plus, but there’s something else that kind of hinders it. Guaranteed universal plans have almost no cash value, and they’re incredibly strict when it comes to paying it. Depending on the company, missing so much as one payment could mean giving up the entire policy. They are, however, cheaper than most insurance plans.
Indexed universal is entirely different. Rather than be tied to a set premium, you can adjust the premiums to what you deem fit. Secondly, this policy is linked to stock market value, so its cash value may continuously fluctuate. You could potentially see a ton of financial gain like you would with investing in actual stocks. But that’s also the downside to it. You could lose a lot of value quickly. This type of policy requires you to be more hands-on than the other types of life insurance. Also, you are actually restricted to how much cash value you can receive. For example, if you have a cap of 30 percent and the stocks go up by 50 percent, you would only get that 30 percent. It’s a good idea to familiarize yourself with the process before making a decision.