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Main Types of Life Insurance

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Term Life Insurance

In addition to being the most affordable type of life insurance, term life insurance is the most popular type of life insurance sold (71% of purchasers) according to the Insurance Barometer Report

Term life insurance provides coverage for a certain amount of time and the premium payments stay the same amount for the duration of the policy. Typical choices are policy lengths are 10, 15, 20, 25 or 30 years.

If you pass away within the term of your policy, your beneficiaries can make a claim and receive the death benefit money, tax-free.

Once the term of the policy expires, you may be able to renew the coverage in increments of one year, known as guaranteed renewability. But each year of renewal will be at a higher rate.

Permanent life insurance

Permanent life insurance provides lifelong coverage. It’s more expensive than term life because it:

  • Can last for the duration of your life.
  • Usually builds cash value.

The cash value component accumulates on a tax-deferred basis over the life of the policy. It acts as a savings portion of the policy. Typically, you can borrow against the policy’s cash value or make a withdrawal. If you decide to end the policy, you can get the cash value minus any surrender charge.

In some policies the cash value may build slowly over many years, so don’t count on having access to a lot of cash value right away. Your policy illustration will show the projected cash value.

There are several varieties of permanent life insurance:

  • Whole life insurance offers a fixed death benefit and cash value component that grows at a guaranteed rate of return. Many whole life insurance policies pay out dividends that can be used to reduce premium payments or can add to your cash value.
  • Universal life insurance often offers more flexibility than a open care final expense plans. You may be able to alter your premium payments and death benefit, within certain limits. With a universal life insurance policy, the cash value will build depending on the policy type. For example, an indexed universal life insurance policy will have cash value tied to an index such as the S&P 500. A variable universal life policy will typically have investment subaccounts that you can choose and manage.
  • Burial insurance is a small Life insurance for couples with a small death benefit, often between $5,000 and $25,000. Burial insurance is designed to cover only funeral costs and final expenses.
  • Survivorship life insurance or “second to die life insurance”  insures two people under one policy, usually a married couple. When both spouses have passed away, the policy pays out the death benefit to the beneficiaries. Usually, survivorship life insurance is part of a larger financial plan to fund a trust or pay federal estate taxes.

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