Types of Life Insurance – part 2

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types of life insurance 1

Universal Life Insurance

Universal life insurance is a permanent life insurance cover with an investment savings element with low premiums and flexible premium options. Some are single premiums (single lump-sum premiums) or fixed premiums (scheduled fixed premiums).

How Universal Life Insurance Works

Universal life insurance gives you more flexibility to the policyholder where they have the flexibility to adjust their premiums and death benefits. Universal life insurance premiums consist of two components as a cost of insurance (COI) amount and a saving component known as the cash value.

  • The price tag on universal life insurance is the minimum amount of a premium payment that is required to keep the policy.
  • Beneficiaries only receive the death benefit.
  • A universal life insurance policy will accumulate cash value and there no tax implications for policyholders who borrow against the accumulated cash value of their policy.

The minimum amount of premium payment is required to keep the policy active. It consists of several items bound together into one payment. COI includes the charges for mortality and policy administration where COI will vary by policy based on the policyholder’s age, insurability and the insured risk amount.

With the time, the cost of insurance will increase as the insured ages but however, if sufficient, the accumulated cash value will cover the increases in the COI.

Universal life policyholders may also borrow against the accumulated cash value without tax implications and the interest will be calculated on the loan amount as well as a cash surrender fee. Unpaid loans will reduce the death benefits by the outstanding amount along with an unpaid interest on the loan deducted from the remaining cash value.

Insurance

Universal Life Flexible Premiums

A universal life insurance policy has flexible premiums where the whole life insurance policy has fixed premiums over the life of the policy. Missed payments have to be paid within a specific time frame for the policy to remain active.

The universal life policyholder has the benefit of the flexibility of remitting premiums over the cost of insurance (COI). The excess premium is added to the cash value and interest is accumulated. If there is enough cash value, policyholders can skip payments without the threat of a policy lapse.

Variable Life Insurance

Variable life insurance is a permanent life insurance policy with an investment component where the policy has a cash-value account, which is invested in several sub-accounts available in the policy. A sub-account acts similar to a mutual fund,  except that it’s only available within a variable life insurance policy. A typical variable life policy will have several sub-accounts to choose from, with some offering up to 50 different options.

The appeal to variable life insurance lies in the investment element available in the policy and the favorable tax treatment of the policy’s cash value growth. Annual growth of the cash value account is not charged with tax as ordinary income.

Similar to mutual funds and other types of investments, a variable life insurance policy has to be presented with a prospectus, detailing all policy charges, fees, and sub-account expenses.

Variable Universal Life Insurance

Variable Life Insurance is a permanent life insurance policy that allows the ability to accumulate cash value while providing variety and control over professionally managed investment options. You have the freedom to monitor and make decisions on where to allocate your funds over time. This product provides flexible premiums and a flexible death benefit.

How does it work?

  • Determine how much you need
  • Calculate how much your beneficiary may need to cover expenses. 
  • Decide how your money should be invested
  • Work with your financial advisor to determine the best investing strategy for your cash value.
  • Death benefit allocation
  • The policy pays a death benefit to your beneficiary — typically a family member — if your death benefit is still intact.

Advantages and Disadvantages of Variable Life Insurance

With this policy, you can take advantage of potential market growth because your policy value is invested in underlying sub-accounts which are subject to market fluctuations. Your policy also has the flexibility of adjustment to your changing needs.

Somehow, a variable universal life policy gives greater responsibility to you. You assume the investment risk, and you select and monitor your underlying investment options instead of the insurance company doing it on behalf of yours.

Keep in mind that as your life changes in situations like marriages, birth of a child or a job promotion, so will your life insurance needs. You must keep in mind that these strategies and products are suitable for your long-term life insurance needs. Also, make sure you’re able to continue premium payments so your policy doesn’t lapse if the market goes down. If you take a loan, withdrawal or partial or whole surrender, your death benefit may reduce, your policy may lapse or you may face tax consequences.

Insurance

Simplified Issue Life Insurance

“Simplified issue” means where you answer a few questions regarding your medical history for the life insurance application without undergoing a medical exam.

Simplified issue and guaranteed issue life insurance makes it quick and easy to apply. If you’re a healthy person, you’ll get a much better rate per $1,000 of an individual’s life insurance coverage by going through a standard application procedure which will include a life insurance medical exam. 

A life insurance medical exam is fairly straightforward. A medical technician will record your height, weight, blood pressure and collect a blood, urine or saliva sample. The results will be combined with your age and health history to calculate the rate you pay for coverage. You can increase your odds of getting better rates by improving blood pressure, losing weight if you’re overweight and kicking the habit if you are smoking.

Guaranteed Issue Life Insurance

Guaranteed issue life insurance, or guaranteed acceptance life insurance, is a type of whole life insurance policy that does not require you to answer health questions, undergo a medical exam, or allow an insurance company to review your medical and prescription records. You may also see it referred to as “no questions life insurance” or “no questions final expense insurance.”

Guaranteed issue life insurance always has a waiting period. If you die during the waiting period, your beneficiaries will not receive the policy’s death benefit. With most policies, the waiting period is two years. With some, it’s three.1

This is not some kind of scam. In fact, if you die during the waiting period, the insurance company will repay (to your beneficiaries) all your insurance premiums plus interest, usually at a rate of 10%.

Guaranteed issue life insurance is a small whole life insurance policy with no health qualifications.

It pays a cash death benefit of $2,000 to $25,000 to the insured’s beneficiaries.1

Guaranteed issue life insurance does not pay death benefits during the first two or three years the policy is in force, but it does return the policy’s premiums plus 10% interest if the insured dies during this period.

Guaranteed issue policies are designed for people with serious health conditions that keep them from buying policies that offer immediate death benefits.

Compared with other types of life insurance, guaranteed policies generally have high premiums relative to their death benefits because their policyholders are in poor health.

How Guaranteed Issue Life Insurance Works.

Given these age requirements and the lack of medical underwriting (health questions), you can see why insurance companies market guaranteed issue policies to this age group.2 Yet many people in this age group, even those with health problems, have options besides guaranteed issue life insurance. This type of insurance is best for people who have no other options because of their health—or who can’t afford any other options because of their health..

Which conditions will disqualify you from any other type of health insurance? Not as many as you might think.

  • You have a terminal illness with a life expectancy of less than two years.
  • You have had or need an organ or a tissue transplant.
  • You are on dialysis.
  • You have Alzheimer’s or dementia.
  • You are in a nursing home or hospice.
  • You have cancer (and it’s not basal cell or squamous cell skin cancer).
  • You have AIDS or HIV.
  • You are in a wheelchair because of a chronic illness or disease.
Types of Life Insurance

Final Expense Insurance

Final expense insurance policy is a specially designed cover to pay your bills which your loved ones will have to face after your death which includes medical bills and funeral expenses.

With funeral insurance, the value of your policy will be proportionate to the expense of your desired funeral.

The actual cost of your final expense insurance will depend on your age. The older you are, the larger the premiums will be. This is because insurance companies take on more risk when insuring older people, due to the fact that they’re statistically closer to death.

When you pre-pay for your funeral, you get the ability to personalize it. You can grill different funeral directors until you find the best for you. You can pick out the perfect casket for you and the plot in the cemetery as you wish

Pre-paying will more likely allow you to promptly talk to your loved ones about your choices. This will allow both parties more peace of mind.

States have varying guidelines on funeral pre-payment. These guidelines work to prevent you from paying unscrupulous people who can take your money and vanish. It helps to protect you or your family from overpaying on top of what you pre-pay. Before you pre-pay, you will have to check on your state guidelines for how the money will be held until your death.

If your funeral plans change or you move, you and your family may not get that money back. Also if the funeral parlor goes out of business and you may lose that money entirely. Final expense insurance provides your surviving relatives with a pay-out they can spend anywhere. You will have less control but your family will have more flexibility.

Group Life Insurance

Group life insurance is the oldest of the employer-sponsored group insurance benefits since 1912. The most common type of group life insurance offered by employers is yearly renewing coverages. It is a less expensive form of protection where the employer can provide for employees during their working years. Due to a shorter average life expectancy, older employees and males will have usually higher premium rates. The premium for the entire group will be the sum of the appropriate age- or sex-based premium for each member of the group. Obviously, a particular employee’s premium will increase yearly with age.

However, if there’s a continuation of hiring younger employees, the lower premium for new hires can offset increases due to aging employees hired some years earlier. If young employees replaced by older ones, premiums will tend to stabilize or decrease. This flow of covered lives helps to maintain a fair and stable average total premium for the employer group.

Types of Life Insurance

Benefits

Most group life insurances provide death benefits equal to the employee’s annual salary, one and one-half times the salary, or twice the salary. Some provide three or four times the salary, but some states and most of the insurers set limits on maximum benefits and some provide a flat rate. Other employers base the amount on the position of the employee, but they have to be careful to adhere to non-discrimination laws. An amount equal to some multiplier of the salary is most common and reduces the possibilities of discrimination. Insurers’ underwriting limitations are based on the total volume of insurance on the group.

Many group plans terminate an employee’s group life insurance when the employee retires. Those insurance covers that allow employees to maintain coverage after retirement usually reduce the amount of insurance available. If an employee is insurable at retirement, additional life insurance may be purchased on an individual basis and the employee can use the convertibility option in most group plans (regardless of the reason that employment terminates) to buy an equal or lower amount of permanent life insurance with level premiums based on the employee’s age. Because of the potential adverse selections and the increase in mortality rates after middle age, the costs of conversions tend to be higher as well.

Group universal life insurances are available from many employers. This insurance is usually offered as a supplement to a separate program of group-wise benefits.

I hope that you would have got the idea of what each of these life insurance means. Now you can decide on which insurance is the best for you.

Click here to refer, Types of Life Insurance – part 1 .

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