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life insurance

When it comes to life insurance, most of us understand that it can be an important component of the financial security of our families. (And if you’re not, check out our How Does Life Insurance Work article. But understanding what the different types of life insurance are and if they’re right for your particular situation can be trickier. Life insurance is not a one-size-fits-all product. And the type that is best for you today, may not be the best fit as your life and circumstances change over time. So, it can literally pay to know what the different types of life insurance are.

This article defines the basic life insurance options. Consult your financial advisor or insurance broker for details about your specific situation.

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Life Insurance In A Nutshell

Simply, put, life insurance is a contract between you and the insurance company where you pay into the policy while you’re alive and the policy pays out a cash payment to your surviving beneficiaries when you die. Sometimes called a death benefit, this cash settlement fills the gap that may occur if your loved ones no longer had your income or other household support. Life insurance funds can be used in many ways: to help pay for immediate and ongoing costs like funeral charges, daily living expenses, mortgage or rent, other types of loans, sustain a business or other expenses.

Two Basic Types of Life Insurance: Term and Permanent

When it comes to types of life insurance, there are two basic types: Term Life Insurance and Permanent Life Insurance. Any policy is going to fall into one of these two categories, though there are different types within the categories.

Term Life Insurance for Seniors

Term Life Insurance

Term life insurance provides a benefit for a specific period of time only. The period, or term, can be as little as five years or as long as 30 years. When the term is up, the policy expires (though often can be extended or converted.) If you outlive the term, no payout is made.

Term life insurance often can be the most economical policy. Many people find the plans to be sufficient to protect their families, especially if the need for coverage is limited, such as just until the mortgage is paid off, or until the kids get through college.


Permanent Life Insurance For Seniors

Permanent Life Insurance

Permanent Life Insurance is a blanket term for insurance that lasts your entire lifetime, as long as you continue to pay the premium. These plans also include a cash value savings component. The savings component earns tax-deferred interest, and the policyholder has some ability to access the policy’s cash value for big expenses like a down payment on a home or health care needs. Initial premiums are generally higher than term life plans for the same amount of coverage but offer greater flexibility including changing the premium or the death benefit.

The Different Types of Permanent Life Insurance Plans

There are several types of life insurance that fall under the umbrella of permanent life insurance. They offer the basic benefits of permanent life insurance but have differences in the cash value component.

Whole or Ordinary Life Insurance

This is the most common type of permanent life insurance policy. If you pick this type of life insurance policy, you are agreeing to pay a set amount in premiums on a regular basis for a specific death benefit. Your premium and the death benefit stay the same throughout the life of the policy and there is a guaranteed minimum on the cash value, the growth of which is dependent on the insurer’s predetermined and fixed interest rate.

Universal Life Insurance

This type of life insurance policy offers you more flexibility than whole life insurance. You may be able to increase the death benefit if you pass a medical examination. There is an adjustable, guaranteed death benefit and a guaranteed minimum cash value, but the growth of the cash value is tied to the insurer’s portfolio performance.

Variable Life Insurance

The variability of this type of permanent life insurance refers to the cash value and the death benefit. Both can fluctuate over time; however, the death benefit has a guaranteed minimum. There is no guaranteed minimum for the cash value. Its growth is based on investments in mutual funds offered by the life insurance company, so there is potential for growth or loss as the market fluctuates.

Variable Universal Life Insurance

As the name implies, this type of policy combines the features of variable and universal life policies. Premiums are flexible, but the death benefit can fluctuate and has no guaranteed minimum. Similarly, there is no guaranteed cash value. As the policyholder, you can choose the assets your premiums are invested in, giving you both more control and more responsibility.

Indexed Universal Life Insurance

This plan typically links the cash value component to a stock market index and will fluctuate based on market performance. While there is no guaranteed minimum gain, the cash value is protected against negative returns and the maximum is capped. The death benefit is also adjustable.

NOTE: For some individuals, getting a combination of both Term Life Insurance and Permanent Life insurance is the best solution for their needs.

Summary

The amount of coverage and the best type of insurance for you depends on many factors. Who do you need to protect? What are their needs? How long will they need support? Are you interested in the cash value component? Taking the time to think through these questions can help you make sense of the what the different types of life insurance are and how to make the best choices for you and your loved ones.

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