Studies show that just over half of Americans have life insurance protection. Nearly most of that protection is through group insurance with an employer. The other protection is through an individual policy with an insurance company. Because the purpose for life insurance is to protect your family from the unexpected, it is important to understand what type of life insurance is best for you and your family.
As mentioned, group insurance through an employer is the most familiar type of life insurance. Group insurance is typically term coverage, meaning not permanent coverage or coverage that lasts throughout your life span. The coverage is usually only one to two years of your salary. This amount can be significantly lower than the amount that is needed to provide for your family if the unexpected happens.
A positive outlook on group insurance is that you do not have to quality for coverage. You do not have to worry about being declined due to health impairments. Just being an employee (a full-time employee in most cases) qualifies you to be a part of the pooled coverage with all other employees.
The downside to group coverage is the loss of coverage once you leave the company. When you or your employer terminates your employment, your group life insurance coverage is terminated as well. Hence, leaving you vulnerable and unprotected from the unexpected.
Because many find that having group insurance alone is not adequate coverage for their family needs, they purchase individual plans through an insurance company. If this is something you are contemplating, here are two of the five main types of life insurance plans to consider:
Term insurance is a short-term type of life insurance that is known as temporary insurance. However, it is the most common type of coverage. It lasts for a specific number of years, such as 10, 20 or 30 years. Once the number of years is reached, the coverage is terminated and a new plan will need to be purchased. The concern with purchasing a new plan is that it will be based on your current age and current health condition. This can cause the new premiums to be much higher than the plan that just terminated.
The most favorable aspect of term insurance is the relatively low premiums. Premiums are more budget friendly, compared to permanent insurance, when purchased with a larger benefit amount (amount that is paid to the beneficiary if the unexpected happens). Although the premiums start out much lower, the premiums are not level. This means the premium will increase each year until the plan terminates.
Another concern to term insurance is that there is no cash value that accumulates from the paid premiums. The premium is basically a payment for a death benefit for your family if the unexpected should happen within 10, 20 or 30 years, whichever plan is purchased.
WHOLE LIFE INSURANCE
Whole Life insurance is a long-term type of insurance that is known as permanent insurance. Whole life insurance coverage is designed to last your entire life and not terminate after a specific amount of time, like term insurance. These plans have level premiums, which means they do not fluctuate or change year-by-year. They remain the same throughout the life of the policy.
A favorable aspect of whole life insurance is that once you qualify for coverage, you are set. Your age and health are assessed at the time of purchase only. Once coverage is in place, you will not have to worry about re-qualifying at a later date, like when a health impairment develops. This is of course as long as the premiums are paid and no lapse in coverage has occurred.
The best time to purchase whole life is at a younger age. This is not to discourage purchasing coverage at an older age. You have to keep in mind that you have to qualify for coverage and your health is typically better at a younger age, so the premiums are lower. Because an older policy owner has a shorter amount of time to make premium payments into the policy, the premiums are much higher than a younger policy owner.
Another favorable aspect of whole life insurance is the ability to build up cash value in the policy. The policy contains a savings account that accumulates cash value on a tax-deferred basis. At least a portion of this money can be accessed at any time by the policy owner with no tax consequences and be used for any purpose. On older whole life insurance policies, the cash value generally grows at a low interest rate.
These are two of the main five types of life insurance. It is important to remember, there is not a one-size fits all type of life insurance. You must determine what type is best for your family.
Stay on the look-out for the remaining three types of insurance in next Friday's article.
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