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Life insurance is a contract between a particular person and an insurance company. The person, called the policy owner, pays regular premiums. The insurer agrees to pay a death benefit to the beneficiaries when the policy owner passes away.
The main goal of life insurance is to provide financial support to the policy owner's dependents after their death. It helps cover bills and living expenses. Understanding your policy is important to choosing the right one.
The typical features of an insurance policy are as follows:
●Term: The term refers to the duration the policy lasts. Whole life insurance covers you for life. Term life insurance covers you for a set number of years.
●Premium: The premium is the cost of the policy. You can pay monthly, quarterly, or annually. Some policies allow a one-time payment.
●Death Benefit: The death benefit is the amount your beneficiaries receive after you die.
●Beneficiary: The beneficiary is the person who gets the death benefit when you pass away.
You can also add extra coverage through riders. Riders are optional add-ons that provide additional benefits for an extra cost. Common riders include coverage for terminal illness, guaranteed insurability, and waiver of premiums if you become disabled.
Major types of life insurance
There are two types of life insurance as mentioned below.
●Term Life Insurance
Term life insurance is the most popular option. It allows a specific duration of coverage. On the expiration of the term, the policy becomes null and void. The three main types of term life insurance policies are level term, declining term, and renewable term.
●Level-term life insurance
Level-term life insurance has premiums and death benefits that remain constant throughout its duration. The amount you pay and the beneficiaries benefit remain unchanged. It is an ideal option for those who want a stable, predictable benefit.
●Yearly renewable term life insurance
A yearly renewable term policy lets you renew coverage each year without a new medical exam. Premiums can increase as you age, but the death benefit stays the same. This policy offers flexibility to adjust coverage annually.
●Decreasing life insurance
The decreasing-term life insurance policy has diminishing coverage. A level premium is paid, while the death benefit is deducted annually. The entire benefit will become zero by the completion of the term.
This policy is often used to cover debts that decrease over time. Examples include mortgage life and credit life insurance. There are two types: mortgage life and credit life insurance.
Mortgage life insurance takes care of your remaining mortgage balance in case you die before fully paying it off. It mostly benefits lenders, who are beneficiaries.
So if you died during a particular period, your loved ones may not receive any death benefit at all. While the mortgage balance goes down over time, the premiums remain constant.
Credit life insurance pays off loans or debts on credit cards when you are dead. As one’s debt reduces, the policy’s death benefit decreases.
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The credit expires totally when all outstanding debts have been cleared up. This assurance is usually provided along with loans or lines of credit.
Whole Life Insurance
Whole life insurance is a type of permanent life insurance. It is often used to cover funeral costs, end-of-life expenses, and debts.
This coverage, also known as ordinary life or continuous premium life insurance, guarantees a fixed death benefit and premium amount. The premium remains the same as you get older.
With whole life insurance, you can benefit from investments. Part of your policy is invested in funds you choose. This means there is potential for both gains and losses over time.
The cash value is the savings or investment part of whole-life insurance. You cannot get this with term life insurance. The cash value earns interest tax-free. You can use it for loans or to pay premiums. If you cancel your policy, you receive the full cash value.
Universal Life Insurance (UL)
Universal life insurance, also known as adjustable life insurance, enables you to adjust your premium payments, death benefits, and cash value. You have total control over your UL policy. The company invests the money in the stock market.
Think of a UL policy as a mutual fund with added insurance. There are two main types of universal life insurance: indexed (IUL) and variable (VUL).
The main difference between universal and whole life insurance is in their benefits. Whole life insurance policies require payment until death. Beneficiaries get the full amount of death benefit plus any accumulated interest from whole-life plans.
UL policies, on the other hand, invest in equity. This can grow your money tax-deferred to pay premiums. However, if the investments perform poorly, you may need to make up for losses that bring down your fund value below the minimum amount of the premium payable.
Life insurance without a medical exam
Most life insurance policies require a medical exam. This exam helps insurers assess your risk level. The underwriting process considers various factors:
●Your lifestyle and hobbies
●Your medical history and occupation
●Your age, gender, and mental health
Even if you’re not in perfect health, providing honest health information can lower your premiums. The more detailed the information, the cheaper the premium is likely to be. Insurers often charge higher premiums for poor health or unhealthy lifestyles.
Streamlined methods that don’t require a full medical exam are used by some insurers. They instead depend on algorithms and shorter questionnaires. This option can be faster but often requires good health and may not be suitable for older applicants.
Your application might be denied if it doesn’t meet the insurer’s standards. However, there are options that do not call for any kind of medical examination.
Conclusion
Choosing life insurance requires careful thought. Assess your needs by evaluating your finances and dependents. Research different policy types, compare quotes, and review policy details thoroughly.
Consider the insurer’s reputation and financial stability. Regularly update your policy to reflect major life changes.
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