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The world of life insurance is vast, and for anyone trying to navigate it without a thorough understanding of what they’re looking for, it’s easy to get lost. Here, we wanted to provide a primer on the types of life insurance commonly available, and instances that may be fitting for buying them.
The first decision to make in buying life insurance is whether you want a variable or non-variable policy. A non-variable policy means that your monthly premium payments are only covering the expense of the insurance. With a variable policy, your payments are higher and cover both the premium and the expense of additional investments. Because of these investments and their variability, your death benefit amount is not fixed. These policies usually carry surrender penalties, meaning you must own them for a certain amount of time to access your money. Also, you may pay more for the investments through your policy than you would if you saved the money and invested on your own. When it comes to investing in life insurance, non-variable policies offer much more flexibility and coverage. But which one to choose? There are four different kinds of non-variable policies, and here are some of the differences.
Term Life Insurance
Term life insurance provides a death benefit for a specific period of time. It’s usually purchased as a temporary insurance option. For example, a parent of a child starting college might purchase a term life insurance policy to help the child pay for college expenses in the event of the death of the parent. Term policies typically have the lowest premium. However, as you get older and renew the policy, the premiums may increase.
If you choose term life insurance, it’s a great idea to get a rider that allows you to convert it to universal life or whole life if necessary. It can open up more possibilities later on, including the option for a life settlement if you decide you no longer want or need it.
Whole Life Insurance
Whole life insurance ensures a set death benefit value for the entirety of your life. It also builds cash value you can use while still living. The premiums tend to be higher, though they’re usually also fixed and unlikely to change with the age of the insured. Whole life is a good option for permanent life insurance.
Because whole life policies accrue cash value, they might not always be a good candidate for a life settlement should the need arise. However, if the policy is young, it may be a good fit. Alternatively, if the policy has a rider that can convert it to universal life, it has a much better opportunity as a life settlement.
Guaranteed Universal Life Insurance
This kind of policy is unique because you are allowed to vary your premium within pre-established policy limits. You can pay for more or less coverage over time depending on your financial situation or anticipated need. However, you must be careful to maintain sufficient policy value, or the policy will lapse. Some policies carry a built-in no lapse guarantee; check with your insurer to understand your limits.
Universal life policies are generally the best candidates for life settlements, and could provide the insured with an amount 5-8 times greater than the cash surrender value.
Indexed Universal Life Insurance
Indexed universal life insurance is still a non-variable policy despite the fact that it includes investment opportunities. This type of policy gives the holder an opportunity to allocate some of the policy’s cash value to either fixed accounts or an equity index account. However, unlike a variable policy, the principal amount in the indexed portion is guaranteed. Many insurers cap the return a policy holder can receive from their indexed portion. These policies generally have low premiums as they are considered “hybrids” in the industry.
Not sure if your policy qualifies for a life settlement? Use our calculator to determine your eligibility and estimate the returns of selling your policy.