What is LIFE INSURANCE?
Life Insurance is best understood as a contract between you and the insurance company. In exchange for your premium payments, the insurance company will pay a lump sum of money to your beneficiaries at the time of your death. As the name implies, this sum of money is called a death benefit. There are different kinds of life insurance. The kind of insurance you need is based on your goals and what you can afford. I sell the following four types of life insurance. They are well-known, frequently purchased, and designed to put you on a path to greater security and protection.
Term life Insurance. Term life is best used to protect your family against large debts. Mortgages and college loans are two examples. Let’s say you have a 25 year $400,000 mortgage. If you die before the mortgage is paid off, a $400,000 term policy completes the payments on your home. Term life is the most inexpensive insurance you can purchase. It’s inexpensive because it lasts for period of years (a ‘term’). Second, the insurance company is banking on the fact that you won’t die before the term expires. In the above example, you pay premiums for 25 years, your term insurance expires, and your still alive. The insurance company pays you nothing. This said, it’s advantageous to have this insurance to protect against large debts. No one can predict the future. Some types of life insurance are investment vehicles. Term life is not one of those. For this reason, it’s called pure or simple insurance. Many term life policies come with accelerated living benefits. They can be renewed when the policy matures. Many can be converted into whole life insurance.
Whole Life Insurance. Like term insurance, the purpose of whole life insurance is income placement. Unlike term life insurance, whole life is designed to last your entire life, not just for a period of time. Another important difference between whole and term life is that a portion of your whole life premium goes toward accumulating cash value. Cash value, and other mechanisms of the policy, increase the policy’s face amount over time. If you allow your cash value to accumulate, it can cover missed premiums. You can use it to take out a loan on the policy. Think about that home improvement project you’ve wanted to do for years. Riders can include but are not limited to accelerated living benefits, waiver of premium, and long term care. Because whole life is designed to be an investment vehicle, and last your entire life, it is much more expensive than term life. Applications are subject to medical underwriting.
Final Expense. Final expense insurance is a whole life policy. It will never expire. But unlike traditional whole life policies, it is not designed to replace income. It’s purpose is to pay ‘final’ expenses when the insured dies. Expenses include, but are not limited to, funeral and burial costs, credit card debt, and remaining medical bills. Compared to traditional whole life policies, face amounts are small. Most final expense plans are medically underwritten but some don’t require it. No medical questions to qualify. The tradeoff is a higher premium for a lower face amount because the insurance company takes on greater risk. It accepts you ‘as is.’ Premiums remain level for the life of the policy.
Guaranteed Universal Life (GUL). Guaranteed Universal Life is designed for people who want a policy to last their entire lives but who can’t afford whole life insurance. Think about GUL as a hybrid of term and whole life. Because GULs don’t accumulate cash value, they’re like term policies. The face amount you sign up for is what your beneficiary receives when you die. Unlike term policies, GUL’s are guaranteed to be in force to age 90, 95, 100 or 121. They’re less expensive than whole life but more expensive than term. Premiums are level. Riders include, but are not limited to, return of premium (also called ‘cash out’) and accelerated benefits. Applications are subject to medical underwriting.