Ask someone how many types of life insurance there are and you’re bound to get several answers. That’s because there are countless variations of policies, policy types, and subsets of product choices. The most common answer to the question is that there are two broad kinds of coverage: term (temporary) and permanent.
The fear comes in when we begin looking at the endless versions of permanent life insurance contracts. For those who want just a basic grasp of the topic, here’s a quick look at what to know before seeking out an agent and making a purchase.
What Term is All About
When people purchase insurance on their lives that a), does not have a dollar/cash value, and b), only pays out during a stated term of years, then their contract is called term insurance. The death benefit is clearly stated in the contract, as are the owner’s name, beneficiary’s name, premium payment amount (whether monthly, yearly, or otherwise), the beginning and ending dates of coverage, and the dollar amount of the death benefit.
Note that if you pass away before the contract expires, the beneficiary receives the payout. However, if you outlive the stated contract length, the policy lapses, ceases to exist as a valid legal document, and there is no payout to anyone. All of this assumes that you have continued to make timely premium payments along the way.
Permanent Contracts Have Cash Value and You Can Sell Them
In direct contrast to specific-term coverage, permanent insurance offers dozens of benefits. A unique one is cash value. Legally, these kinds of contracts are assets, and as such you can sell them just as you would a used car, a house, or a piece of land. The good news is that you can easily do a bit of online research to find out how much someone will pay for your policy. Getting an estimate like this only takes a few seconds of searching to find out what your policy is worth. Cash value builds up over time as you pay the premiums, so the longer you’ve been paying, the higher it will be.
Notably, there are also a few different ways to get cash in exchange for the contract, life settlements and viatical settlements being the two most common methods. The bottom line for policyholders is that if you currently have permanent coverage, you can easily get a quote and find a buyer online by researching online. While there are multiple varieties of permanent protection, the three most frequently purchased include whole, universal, and variable universal.
Whole is Insurance and a Savings Account
The simplest of all permanent coverage options, whole life avoids complication in its design. You pay a fixed premium per year or month, have a guaranteed death benefit paid out to the beneficiary, and see a regular increase in the dollar value of the insurance year after year.
As long as you continue to pay the premiums, there’s no risk of cancellation. Plus, as its worth continues to rise, you’ll have the opportunity to borrow against it, just as people borrow against the built-up equity in their homes. And as long as you pay the loan back, the overall structure, worth, and payout capacity of the contract does not change.
Universal Allows for Adjustable Premiums
Policyholders who wish to borrow against their policies are often willing to pay higher premiums to offset the amount borrowed. That’s the advantage of universal contracts. As the years go by, holders have the choice to reduce or increase premiums, which of course affects the mathematics of the rest of the coverage, notably the amount that goes toward cash value.
Variable Universal Has an Investment Component
Are you the type of person who wants to control how the cash value portion of your policy is invested? If so, variable universal may suit your needs. In addition to the buildup of dollar value and adjustable premiums, the insured gets at least some say in how that dollar value component is invested. Most carriers offer a wide range of choices that include mutual funds, index funds, and individual stocks. Your job is to decide upon the right risk level and understand that you might end up gaining or losing as time passes.
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