Life Insurance 101, An Explanation of Various Types of Life Insurance
TERM LIFE INSURANCE - Life insurance for a set number or years. You can choose from 5 to 30 year terms. No cash value, if you die during the term you collect the death benefit. The policy dies after the selected term has ended and you receive nothing unless you have a, return of premium rider or you convert the policy to some form of permanent insurance.
RETURN OF PREMIUM TERM INSURANCE (ROP) - A term insurance policy that returns all or a portion of premiums paid at the end of the term if the death benefit has not been paid.
SIMPLIFIED TERM INSURANCE - Term insurance which uses a simple application. Underwriting is done electronically. No underwriting requirements by the applicant unless red flags arise out of the electronic underwriting process. Policy is usually issued much quicker than regular term. There is a limit of death benefit for this type of policy ($350,000 or less) depending on the insurance carrier. This type of policy is generally more expensive because of additional risk by the insurance carrier. Less underwriting =more risk.
CRITICAL ILLNESS INSURANCE - Applied for as a stand-alone policy or as a rider to another life insurance policy. Pay immediate benefit for a covered illness even if death does not occur.
ACCIDENTAL DEATH INSURANCE - Pays benefit in event of a covered sudden accidental death. Applied for as a stand-alone policy or as a rider to another form of life insurance.
MORTGAGE PROTECTION INSURANCE OR DECREASING TERM INSURANCE - Term insurance that pays the balance of your mortgage should death occur. The amount of death benefit decreases to match the amount owed on mortgage. The insurance is set up to end at the same time your mortgage is set to end.
UNIVERSAL LIFE INSURANCE (non variable) - Flexible premiums. Can be a permanent insurance as long as premiums are paid and policy is funded properly. Investment policy in which risk lies with insurance company.
Has a minimum guaranteed interest rate which differs by company. This policy has the ability to gain contract value. The death benefit can be set to level (death benefit stays the same throughout) or increasing (death benefit increases as contract value rises). You may obtain loans or make withdraws but you must be careful, if the policy is not funded, it will collapse.
VARIABLE UNIVERSAL LIFE INSURANCE - Agent must have securities license to sell. Very similar to non-variable universal life. The difference is that the policy owner assumes investment risk. There is no guaranteed interest rate. Policy can collapse if investment does not do well and policy is not funded properly.
WHOLE LIFE INSURANCE - Simply put, you pay the premium and the policy will last your whole life. You usually have an option to borrow against the policy, amount depends on the value of the policy. This type of policy is usually much more expensive than the universal life policy.
GRADED BENEFITS WHOLE LIFE - Partial or no benefits paid until a named or tiered waiting period has passed. If you die before the waiting period has passed, you usually will receive the return of your premium payments with some sort of interest.
FINAL EXPENSE WHOLE LIFE INSURANCE - This type of whole life insurance is aimed at burial and funeral expenses and other final expenses. Usually, no medical exam required and death benefit is limited to $50,000 or less.
SINGLE PREMIUM WHOLE LIFE - This whole life policy is paid for by a single lump sum payment. In return the beneficiary receives a larger death benefit than the payment.
THINGS TO CONSIDER: You may be interested in mixing and matching different types of policies. For example; There is a need for 500k immediately. As time goes on, the kids have graduated college and are out of the house, the house is almost or totally paid off. Now the need is less. In this example you may want to purchase a 330k universal life and a 20 year 200k term. This plan will save you money and still protect your family for life.
Or, you may want to mix term, critical illness, accident, universal life, or whole life in various ways depending on your needs.
RIDERS:
Waiver of Premium Rider - pays life insurance premium if you become disabled and can't work. There is usually a waiting period and rider usually expires at age 60 or 65.
Critical Illness Rider - Rider is explained above.
Return of Premium Rider - Rider is explained above.
Guaranteed Insurability Rider - this rider allows you to purchase an additional amount of life insurance at a later date without having to prove insurability again or take another medical exam.
Term Conversion Rider - allows you to convert a term insurance policy into a permanent policy without proving insurability again.
Accelerated Benefit Rider - this rider is only for permanent life insurance policies. This rider is usually included automatically for free. It allows you to collect a portion of your policy's death benefit if you become terminally ill with a short life expectancy, usually one year. The portion paid out is subtracted from you policy's death benefit.
Accidental Death Benefit Rider - This rider pays in addition to the death benefit if you die from an accident.
Child protection Rider - Usually used to pay final expenses if the unthinkable happens. Often, at a nominal cost and purchased in units of $1,000.
UNDERWRITING: requirements depend on insurance carrier, type of policy, amount of death benefit, age, build chart, gender, medical history, medications, family history, motor vehicle report, and other factors.
An application is always required, although, non-medical policies usually have a simple application.
Requirements could be: Paramed (certified medical processor or nurse comes to your place of choosing, takes you through a medical questionnaire, measures your height and weight, takes blood and urine sample, possibly EKG either resting or non-resting), Medical information from your physician or hospital, Medical exam, etc.
HEALTH CLASSES - Typical health classes would be, Preferred Best, Preferred, Select Standard, Standard, and then different nicotine classes such as, preferred nicotine, select nicotine, and standard nicotine.