As 2016 kicks off, many Americans are contemplating different types of life insurance to protect their loved ones. As we all know debt, marriage and children bring financial responsibilities that must be considered.
To answer some of the questions that may come up, we are providing you with a primer defining the different types of life insurance available in 2016 to help you decide which is right for you.
Far too many people are daunted by the process or overestimate the cost of purchasing life insurance.
That should never discourage you from making inquiries and protecting your family with a policy that covers the worst possible scenarios. Many Americans who do own some form of life insurance are underinsured ! It’s important to make an informed choices.
Quick Guide to the Types of Life Insurance Available in 2016
- Reasons to Use an Independent Agent
- Types of Term Life Insurance
- Types of Permanent Life Insurance
- Types of General Life Insurance
- Types of No Exam Life Insurance
- Types of Life Insurance Riders
- Types of Business Life Insurance
Knowing the details of the different types of life insurance available in 2016 and the cost of each option, is only the first step to fully understanding your needs. Prices may vary dramatically. This is why you should always use the services of an independent life insurance agent. Agents at Huntley Wealth are here to help you with the selection and buying process.
An independent agent can properly evaluate your needs both now and down the road. They also know which life insurance companies in 2016 offer the most affordable and suitable policy for YOUR personal needs, because “one size does not fit all” when it comes to buying life insurance.
Types of Life Insurance 2016
There are 6 basic types of life insurance:
- Term Life Insurance
- Permanent Life Insurance
- General Life Insurance
- No-Exam Life Insurance
- Life Insurance Riders
- Business Life Insurance
Term Life Insurance Explained
Most people know or have heard of Term Life Insurance. It’s the most basic and affordable because it pays death benefits only.
Essentially, you have to decide how much coverage you need for death benefits which can range from $100,000 (or lower) to $5 million plus. Uses for death benefits include:
• Income Replacement
• Personal Debt Repayment
• Business Purposes
• Mortgage or Rent Payment
• Funeral and Burial Expenses
The second thing you need to decide is how long you will need the life insurance for. Terms may be bought for as little as 1 year to cover business loans for example, or you may purchase a term for 5, 10, 15, 20, 25 or 30 years.
A few companies will even sell policies which are age specific, such age 55 or 65 for example.
There is one catch. If your policy is about to expire, and you need to renew it, the premium will cost you a lot more than when you originally bought it. Re-evaluation is based on your current age and health. Luckily, there are term policies which cover these issues.
The majority of Americans should consider Term over Permanent life insurance as it is the most suitable for the majority of people who need life insurance. Most people would be better off buying Term and investing the money they would save making payments on a permanent life insurance policy.
One thing many people may not know about Term insurance is that there are actually 14 different types of Term policies to choose from:
1. Level Term Insurance – This is the most common type of life insurance policy people are buying in 2016. This simply means that your death benefits remain the same throughout the life of the policy and the premiums you pay are generally fixed. Make sure you enquire about this as some insurers do sell policies where premiums may increase.
2. Guaranteed Term Life Insurance – For this type of policy the premium you will be paying is guaranteed to remain unchanged for the length of the term you purchase.
3. Guaranteed Level Term Life Insurance – The premium for a Level Term policy is guaranteed to remain unchanged for the length of the term that you purchase. Typically for a 20 or 30 year term for example.
4. Decreasing Term Life Insurance – With this type of policy, the death benefits decrease over various designated time increments throughout the life of the policy, but the premiums you pay remain the same. Many people use this type of policy to cover their mortgage.
5. Increasing Term Life Insurance – Very few companies offer these policies but they may be beneficial for young families on a tight budget. With this policy, the death benefits “increase” over various time increments. Generally, you would also see a corresponding increase in your premiums.
6. Convertible Term Life Insurance – This is a feature which may be convenient down the road when you need to renew your policy and your health has declined. The conversion feature allows you to convert to a Permanent policy such as Whole Life or Universal Life without having to take a medical exam so you can continue with your coverage. Keep in mind that you must decide to convert before the date specified which may vary from insurer to insurer.
7. Annual Renewable Term Life Insurance – This is a form of term insurance which allows you to automatically renew the term you bought on your policy before it expires. You can do so regardless of health, but you will be paying a higher premium as you will be rated according to your current age when you renew. These types of life insurance policies can be purchased as 1 year renewable or 5 year renewable.
8. 10 Year Term Insurance – This type of term policy will cover you for a period of 10 years. When it expires you have to either renew it for another term or convert the policy to a permanent policy before the expiration date. To renew the policy you will be required to undergo a medical exam and the cost will be based on the results of that exam and your age. The renewed policy will likely be more expensive than when it was first issued.
9. 15 Year Term Insurance – This type of term policy will cover you for a period of 15 years. When it expires you have to either renew it for another term or convert the policy to a permanent policy before the expiration date. To renew the policy you will be required to undergo a medical exam and the cost will be based on the results of that exam and your age. The renewed policy will likely be more expensive than when it was first issued.
10. 20 Year Term Life Insurance – This type of term policy will cover you for a period of 20 years. When it expires you have to either renew it for another term or convert the policy to a permanent policy before the expiration date. To renew the policy you will be required to undergo a medical exam and the cost will be based on the results of that exam and your age. The renewed policy will likely be more expensive than when it was first issued.
11. 25 Year Term Life Insurance – This type of term policy will cover you for a period of 25 years. When it expires you have to either renew it for another term or convert the policy to a permanent policy before the expiration date.To renew the policy you will be required to undergo a medical exam and the cost will be based on the results of that exam and your age. The renewed policy will likely be more expensive than when it was first issued. This policy may no longer be available for older individuals as some term policy lengths have age cut-off dates.
12. 30 Year Term Life Insurance – This type of term policy will cover you for a period of 20 years. When it expires you have to either renew it for another term or convert the policy to a permanent policy before the expiration date. To renew the policy you will be required to undergo a medical exam and the cost will be based on the results of that exam and your age. The renewed policy will likely be more expensive than when it was first issued. This policy may no longer be available for older individuals as some term policy lengths have age cut-off dates.
13. Work Term Life 65 – This type of Term policy, which is only available through Prudential life insurance, allows you to buy at any age and will cover you specifically to age 65. This means that the term you buy will be custom fitted to suit you at the age of purchase. If you buy a policy at 22, it will actually be a 43 year term.
14. Select-A-Term – This type of term policy, which is only available through American General, allows you to select a specific term for a number of years such as 23 years (or some other term length). It is vital that you choose adequate death benefits and the length of term carefully. You should look past your current situation to take into account the cost of inflation and what your earning power and future debts might look like in 20 or 30 years.
Permanent life insurance, also known as “Cash Value Life Insurance” is issued in various packages. These policies tend to be much more expensive than term insurance for the following reasons:
• Coverage is for life, eliminating the need to renew the policy
• Provides death benefits
• Cash value accumulation feature, which builds up over the life of the policy
• Allows you to borrow against the policy
• Allows you to surrender the policy
Permanent life insurance is more expensive because of the cash value accumulation feature and can easily cost 10 times more than what you would pay for a term policy. The cash value accumulation feature allows the insurer to take a portion of the premium for investment purposes, so you earn interest which builds over time.
There are also a number of administrative fees built into the premiums because of the cash value accumulation feature. Most of your premiums in the first 10 – 15 years are used to cover the death benefits and fees. It actually takes quite awhile before you really enjoy the advantages of cash value accumulation.
Permanent policies are more suitable for those with estates or who are in the higher income brackets, rather than the average American.
There are 3 basic types of Permanent Life Insurance;
• Whole Life Insurance
• Universal Life Insurance
• Variable Life Insurance
Whole Life Insurance
There are a number of hybrid variations of Whole life insurance and they vary from insurer to insurer. Whole life is considered the most rigid type of permanent life insurance, as the insured has few or no options when it comes to altering death benefits, premiums or the cash value accumulation feature. Most policies simply lock you in for the duration.
Some of the Whole policy options you may consider are:
1. Straight Whole Life – Also known as “Ordinary Life” will provide coverage and is payable in full at age 100 with level premiums. The policy also provides cash value accumulation which grows over the life of the policy and should equal the death benefits at age 100.
2. Level Premium Whole Life – Is the same type of policy as Straight Whole Life and is considered to be traditional whole life insurance.
3. Continuous Premium Whole Life – Same as Straight or Level Premium Whole life and simply means that the policyholder pays the same premium over the entire lifetime of the policy which is generally to age 100.
4. Limited Payment Whole Life – Provides the same type of policy as a straight, level premium or continuous whole life policy but the premiums are paid in a shorter time frame, such as 20 years for example.
5. Single Premium Whole Life – Same type of policies as above but simply means that the policyholder pays a one time all inclusive premium.
6. Whole Life Joint First to Die – A Whole life policy that is provided to 2 people such as husband and wife or 2 business partners. The policy will pay the death benefit when the first of the 2 policyholders die. Premiums are less expensive than for 2 separate policies (Generally not available in the U.S.).
7. Whole Life Joint Second to Die – Same as above, except the death benefit is only paid when both of the policyholders have died. This type policy is often used for estate planning (Available in the U.S.).
8. Whole Life Survivor – Same type of policy as Whole Life Joint Second to Die.
9. 7 Pay, 10 Pay or 15 Pay Whole Life Insurance – These Whole life policies simply mean that you pay all your premiums in full as 7, 10 or 15 year annual premiums.
10. Participating Whole Life – Where you are provided with a few select limited options regarding the investment portion.
11. Non-Participating Whole Life – No options are provided.
As this product is quite complicated, you should consult an experienced independent life insurance agent to discuss the pros and cons of each option.
Universal Life Insurance
Universal Life has the same components as Whole life, with the exception that these policies may be much more flexible for the buyer in terms of:
• How premiums are paid
• The death benefits, and
• How the investment portion is managed
Like Whole Life, there are also many hybrid forms of this product which vary from insurer to insurer.
There are generally 5 types of Universal life including:
1. Standard Universal Life – This is a less rigid version of a Whole Life policy in that it allows you to adjust the premium payments or amount of death benefits over the life of the policy. The cash value accumulation portion will also reflect any changes made in the premiums or amount of death benefits.
2. Indexed Universal Life – Similar to a Standard Life insurance policy except the policyholder is given the option to invest the cash value accumulation portion of the policy into either a “fixed account” or an “index account”. An index account could be S & P 500 or Nasdaq 100 for example.
3. Equity Universal Life – Same type of policy as an “Indexed Universal Life” policy.
4. Guaranteed Universal Life – A universal life insurance policy which allows you to select the amount of death benefits, the duration of the death benefit guarantee, and the length of time that you desire to pay the premiums. Also allows you to build guaranteed cash value in the policy.
5. Variable Universal Life – Also know as a VUL and is considered to be a combined form of both Universal and Variable Life insurance policies. This type of policy allows for a portion of the premium used for the cash value accumulation portion to be invested in a variety of vehicles such as bonds, stocks etc. Profits are non-taxable and can be used to pay premiums. These policies are regulated as securities and must be sold with a prospectus.
As this product is somewhat complicated, it is best discussed with an experienced independent life insurance agent to consider the pros and cons of each product.
Variable Life Insurance
This is considered to be the most expensive type of all forms of permanent life insurance.
1. Variable Life Insurance – These policies provide permanent coverage to the policyholder, allowing them to allocate a portion of their premium to a separate account which consists of a variety of investment choices such as stocks, bonds, equity funds, stock market funds or bond funds. These policies are considered to be securities contracts, which are regulated under federal securities law, and are required to be offered with a prospectus.
There are a number of policies that cater to specialized circumstances that include:
1) Online Life Insurance – This simply refers to any type of life insurance policy which can be purchased online. However, you have to be careful about the quotes provided because some life insurance online quote systems may only provide a limited number of insurers which are select and more expensive.
2) Mortgage Life Insurance – A policy used to cover a person’s mortgage. These policies are sold either by a lender where the lender is the named beneficiary, or can be purchased individually where the homeowner names the beneficiary. It is generally cheaper and more advantageous to buy the policy yourself. Policies are usually a Decreasing or Level Term policy.
3) Advanced Market Life Insurance – This is a term used by life insurance agents to describe more complicated and high premium life insurance concepts for business and high income individuals.
4) Cash Value Life Insurance – Refers to permanent life insurance policies, which not only provide the insured with death benefits, but also have the added advantage of having a cash value accumulation portion which grows tax free through the life of the policy. This benefit may be found in Whole Life, Universal and Variable Life policies.
5) Income Replacement Life Insurance – Policies which are purchased for the sole purpose of income replacement should the primary breadwinner die. Most of these policies are Term life insurance which provide death benefits only.
6) Family Life Insurance – A policy which can be either a Term or Permanent life insurance policy and is intended to provide financial protection or a financial safety net for the welfare of the family to ensure the surviving family members are able to maintain their standard of living.
7) Pension Maximization Life Insurance – The purchase of a policy for retirement purposes and to maximize a person’s pension for when they retire. These policies consist of Permanent policies such as Whole Life, Universal Life and Variable Life. Generally best purchased when a person is maxing out their IRA and/or 401(k) and is seeking an additional tax deferred pension investment vehicle.
8) Endowment Life Insurance – This is a form of life insurance contract which is set up to pay out a lump sum after a defined term (maturity) or when death occurs. Maturities can be either 10 or 20 years, or even a specific age. Some policies will also pay out as a result of a critical illness.
9) Life Insurance as Alternative to Bequest – This simply means that a person names one or more charities to receive the proceeds of a life insurance policy when they die. This can be done in lieu of making a bequest to a charity through a will.
10) Life Insurance for Estate Planning – Life insurance policies purchased for individuals with large estates. The proceeds of such policies provide immediate tax free liquidity to the beneficiaries who can use the proceeds to pay federal and state estate taxes or other expenses.
11) Life Insurance for an Irrevocable Life Insurance Trust – Also known as an ILIT, this simply means that the policyholder surrenders their policy to an entity which acts as the trust for the policy. The trust is irrevocable which means that it can never be changed. It allows you to set up the trust so you can determine how premiums are paid and how the trust later disperses the life insurance proceeds, but once the policy is assigned to the trust, you have no further control.
12) Credit Shelter Trust Owned Life Insurance – This form of trust allows an investor who is married to shelter assets from estate tax. When the insured who owns the trust dies, the trust allocates the tax free assets specified to the beneficiaries (usually the children of the person who set up the trust). The main benefit is that the surviving spouse continues to have rights to the assets in the trust and any additional income generated by the trust during their lifetime. This form of trust can also provide additional protection from capital gains tax.
13) Life Insurance to Fund Special Needs Trust – Many parents have children with special needs. One way to look after your children should you pass away unexpectedly is to use a life insurance policy to continue providing them through a “Special Needs Trust.” This is important because any inheritance over $2,000 could exempt the child from Federal and State aid programs. A trust allows the legal entity to use the funds to provide ongoing support for transportation, education, rehabilitation, medical and dental care not covered under a health plan. However, the funds must not be used for housing, food, cash, utilities or property taxes as this may be viewed as income.
No-exam life insurance is convenient but can cost as much as 3 times more than what your would pay for an equivalent Term policy which does require an exam.
Although you might be able to avoid having to take a medical exam, many insurers will require a brief phone questionnaire, or might review the Medical or Rx database before they will approve your application.
Costs of some life policies soar if you try to buy it without a checkup. As when applying for bank loans, employment or any membership, purchasing life insurance requires the individual to meet certain requirements. Certain types of life insurance may require you have perfect health at the policy’s issuance to ensure you’re not trying to cash in on your imminent sickness or death. No Exam Insurance Realities, Jeff Rose, Nasdaq
If you are young and healthy, you should avoid these policies as they are best suited for those that:
• Need life insurance quickly to cover a business loan
• Have health issues
The maximum amount of death benefits offered by insurers are generally much lower than what you could get for term policies, although there is one insurer which offers no-medical benefits up to $1 million dollars. Typically, maximum death benefits range from $50,000 – $350,000.
There are also 9 variations of these policies, and they are best suited for specific circumstances and particular individual needs. The types of life insurance policies that are referred to as no-exam include:
1) Simplified Issue Term Life Insurance – Provides term insurance to the applicant with a variety of choices when it comes to choosing the length of the term and options. This policy does not require a medical exam but does require the applicant to provide responses to a medical questionnaire.
2) Simplified Issue Universal Life (UL) – Similar to the above, except that in addition to providing the applicant death benefits, this type of policy also provides a cash value accumulation portion. It also requires that the applicant answer a medical questionnaire and does not necessitate a medical exam.
3) Graded Benefit Whole Life – Also known as GBL insurance this policy does not require a medical exam or questionnaire. It offers only limited benefits in the first 1-2 years and may take between 3-7 years to mature. Usually available for older people over age 45. The cash value accumulation generally does not equal the amount of death benefits and premiums are more expensive than other equivalent standard life insurance policies.
4) Rapid Decision Senior Whole Life – Usually available for older clients 50 years plus, this policy will only provide partial coverage in the first couple of years in which the insured must survive before the full policy comes into force. Policy amounts are generally much lower than other equivalent standard life insurance policies. Provides both death benefits along with a cash value accumulation portion which grows tax free.
5) Level Death Benefit Whole Life – This policy provides both death benefits and a cash value accumulation portion. Premiums are guaranteed to remain unchanged and the policy remains in force for the life of the policyholder so long as premiums are paid. Generally does not require a medical exam but a medical questionnaire is usually required.
6) Guaranteed Issue or “GI” policies – A policy for people with serious health issues who would not be eligible for any other standard life insurance policies. Policies do not require a medical questionnaire and coverage amounts are much lower ranging from approximately $5,000 – $25,000.
7) Guaranteed Acceptance Life Insurance – Same as above.
8) Instant Issue Life Insurance – Same as above.
9) Burial or Funeral Expense Life Insurance – Essentially the same as Guaranteed Issue, but can also be sold as other forms of policies depending on the insurer.
These are all different types of no-exam policies and the cost and coverage can vary significantly. Always discuss your needs and situation with an independent agent before you buy, as those companies which advertise on television or online are not especially clear about what they are selling.
Any type of life insurance policy you buy may be supplemented with additional or more comprehensive coverage through purchasing a life insurance rider. These are a separate premium placed on top of what you would pay for a life insurance policy. They also vary from insurer to insurer so choose carefully.
The types of life insurance riders available include:
1. Return of Premium (for term policies only) – This rider can be either bought separately or can be included with your life insurance policy. If you survive, it allows you to get the premiums you paid during the term of your policy reimbursed. It does not include interest. Some policies will reimburse you for both the cost of the rider and the term premiums while others will not cover the cost of the rider itself.
2. Term Conversion Rider (for term policies only) – Although most term policies have a conversion feature that allows you convert a term policy into a permanent policy, some term policies require that you purchase a separate rider. This rider allows you to convert the term policy into a permanent policy and will cost extra.
3. Waiver of Premium – Should you become completely disabled while you have a policy and can no longer afford the premium, this rider will continue to keep your policy current and in force for its duration. This eliminates the burden of having to worry about paying for your premium.
4. Critical Illness Rider – This rider will pay for a critical illness and ensures that you will receive a lump sum payment. The type of critical illness that is covered and the lump sum you receive is clearly outlined in the policy and can vary from life insurer to life insurer.
5. Disability Income Rider – This rider will provide you with a “regular rate of income” should you become totally disabled. However, some policies will only cover you for an accident, and some will only cover you for an illness, while there others which will cover you for both accidents and illness. The amount of income you receive also varies as some insurers may only pay for the period of the disability itself, or for a specified time, or for only a specified amount.
6. Guaranteed Insurability Rider – This type of rider guarantees that regardless of your health, you will be able to buy additional life insurance without having to take a medical exam, or provide any information to your insurer regarding your insurability. Most riders allow you to choose to buy additional life insurance at various time increments, or at specific ages. However, the premium you pay will be based on your age when you buy a new policy.
7. Accelerated Death Rider – This rider is often included in policies these days or can be purchased separately. It permits you to claim a portion of your death benefits should you incur a “terminal illness” where you life expectancy will end within one year or some other period as defined in the policy/rider. The amount of death benefits is generally “capped” at a specified amount or percentage of the death benefits.
8. Accidental Death Benefit Rider – Should you die accidently, this rider will provide you with an “additional death benefit” on top of the amount of death benefits you have selected for your original policy. The additional amount can be double (also known as double indemnity). Some policies will also include additional coverage if you lose your vision or have a limb amputated.
9. Child Protection Rider – This rider will provide coverage for your child/children should they die because of illness or injury. Most of these riders are available in units of $1,000 dollars worth of coverage. They must be purchased before a specified age and are only good until a child reaches a specific age. There are also policies which allow you to convert the rider into a permanent life insurance policy which must be done as outlined in the terms of the rider.
Different types of life insurance may be used solely for business purposes. This may apply to anyone involved in business from a person with:
- Sole proprietorship
- Business partners
- Small, medium and large sized corporations
- or any other type of business entity.
Here are the types of Business life insurance that may be used:
1. Business Life Insurance – A general all encompassing term that refers to any form of life insurance that is specifically used for any business purposes with includes Term and/or Permanent policies.
2. Buy-Sell Life Insurance – A life insurance plan for the purpose of business succession transition should one of the owners die. Comes in 2 types including:
- Cross Purchase Plan – where each owner buys a policy on the other owner(s), and
- Entity Purchase or Stock Redemption Plan – where the owners enter into agreement to sell their portion of the business back to the company upon death.
3. Key Person Life Insurance – Where a company buys a life insurance policy on key or vital employees integral to the maintenance and survival of the business. The company is the named beneficiary for these types of life insurance policies.
4. Executive Bonus Life Insurance – An employer purchases a policy and pays the premium for permanent life insurance policy which is owned by the executive for whom the policy was purchased.
5. Section 162 Executive Bonus Life Insurance – Same as above.
6. Split Dollar Life Insurance – This type of policy is a form of permanent life insurance. A contractual arrangement between an employee and employer, or corporation and stockholder. These policies apportion responsibility for the policy with respect to how the 2 entities share a defined ratio of how premiums will be paid, along with how the cash value and death benefits will be divided between the company and the designated beneficiary of the employee/stockholder.
7. Group Life Insurance – Generally used as a life insurance policy package intended to cover all employees or specific members, and may be optional. Coverage amounts tend to be lower and each employee pays a specific premium to enjoy coverage. Policies are not portable and no longer valid if an employee quits or is terminated.
8. Employer Owned Life Insurance –This simply refers to any form of life insurance policy purchased and owned by a business entity on the life of one or more of its employees and in which the company is the owner and the named beneficiary can be either the company or the employee’s named beneficiaries.
9. Corporate Owned Life Insurance (COLI) – Same as above
10. Life Insurance for SBA Loans – Many small business loans require coverage with a life insurance policy. Usually purchased as Term insurance as 1 Year Renewable Term policies, 5 or 10 Year Term policies.
11. Stranger Owned Life Insurance – Also known as STOLI. This occurs when the policy, which is newly purchased, is then sold to an investor(s) with no insurable interest, with the sole intention of buying the policy for profit.
How to Buy Life Insurance 2016
We cannot stress enough that life insurance is a long term financial investment. Choosing the right product at the most affordable possible price is best achieved through using the services of an independent life insurance agent, such as those at Huntley Wealth.
Independent agents have access to multiple companies. We know which insurers are the most lenient when it comes to particular health issues.
The companies who offered the best deals for diabetics or people with a history of cancer or stroke, for example in 2014 and 2015, seemingly change from year year, so you want to be sure to let an independent agent compare companies in 2016 and shop for the best rates for your personal circumstances.
Call us today at 877 – 443 – 9467 if you think you need life insurance. We can help!
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