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Ideally yes, everyone should have life insurance. If you have a family or plan to start one soon, life insurance is an absolute necessity. In case you suddenly pass, it provides financial support to those who depend on you. For physicians and doctors, it may be even more important given their high income.
When you apply, the life insurance companies need personal information to determine an appropriate rate. This includes your age, height, weight, lifestyle habits, medical history and financial situation. Some insurers will trust your answers to questions about health. Others will vet you more thoroughly. This may include a medical exam to validate the information you provide.
Term life insurance is the most basic, affordable and popular option. If the insured dies during the specified term, it pays a death benefit to the listed beneficiary. Policy periods include annual, 5-year, 10-year, 20-year and the 30-year maximum. Term life is often used to insure against debts that will take 30 years to repay. This makes it a great fit for families with financial burdens.
Although term life is simple at heart, there are a number of variations that can enhance your coverage.
Decreasing term life insurance can help cover loans. It is often used for mortgage, vehicle and personal loans because the death benefit decreases alongside the loan balance. This saves the policyholder premium dollars over time.
Annual renewable term (ART) life insurance allows you to purchase coverage in one-year increments. Premiums for this short-term policy start low and increase over time. Renewal is optional and you enjoy a period of insurability. This means you do not have to repeat the application and underwriting process every year. ART policies are also subject to maximum age limits by state.
Level term life insurance provides a fixed amount of coverage for a specific length of time. You pay the same premium for a period ranging from 5-30 years. Once you reach the end of your term, ART takes over. This installs much higher premiums that increase annually.
In addition to these variations of term life, riders present additional options. Think of them as add-ons or features. Common riders for term life include:
With all these options, term life has its pros and cons. Policyholders enjoy much lower rates, but they can't build cash value over time. Term life rates are much lower, but they only last about seven years on average. Those who elect term life as opposed to more permanent policies typically have a low mortality rate. This influences the ins and outs of the term life.
Whole life insurance is the oldest, most permanent type of policy. It’s also the most expensive. Because of this, whole life has become less popular. Other products provide the same guaranteed earnings, but with higher returns and lower rates.
Although there are no commissions or administrative fees, this is offset by a reduced rate of return. Whole life is not ideal for those with significant debt. It takes a long time for the cash value of the policy to surpass the rate of inflation. Unlike term life, a high mortality rate of policyholders influences the nature of whole life.
As long as you pay periodic premium, your policy will remain in effect for your entire life. Regardless of age or health, your premium is not subject to change. Since the premium is more than the cost of insurance, the whole life policy builds cash value. You can access the funds through policy loans and partial surrenders.
Whole life also offers a handful of variations.
Joint and survivor whole life insurance is ideal for couples. The death benefits will not pay out until both policyholders have passed. This keeps the premium lower than if they had separate policies.
Modified whole life insurance begins with a low initial premium for the first 5-10 years. It then increases until leveling out slightly higher than the normal premium.
Graded premium whole life insurance also features a low initial premium to make it a more affordable product. It gradually increases each year until leveling out.
Graded benefit whole life insurance policies are best fit for individuals with guaranteed issues. This typically means those in poor health who do not qualify for standard life insurance.
Single premium whole life insurance allows you to pay in advance for a future death benefit. In turn, the insurer lowers the rate.
It's no secret that whole life products typically have a poor reputation. Given these characteristics, whole life is gold for insurance agents. This may encourage them to act in their best financial interests, not yours.
Still, whole life isn’t all bad. It can be a nice fit for young adults. Well, if they're in minimal debt, good health and seeking a permanent policy with a death benefit for loved ones. It’s also a viable option for health-insured seniors who need to cover final expenses.
Perhaps the best fit though is the conservative investor. This individual is likely seeking a guaranteed investment and death benefit. This individual prefers large year-end refunds over keeping the money throughout the year. It guarantees a return no matter what happens in the market, as long as you make your payments. It also provides a final expense fund following death.
Universal life insurance is essentially a combination of term life and an annuity. But it's easily misunderstood.
Unlike the temporary protection of term life, universal is usually permanent. The premium is typically higher than the cost of insurance early on. The insurer directs the overage of the premium to a cash account that earns tax-deferred interest. But it decreases in its later stages. Once the premium dips below the cost of insurance, the insurer covers the difference with the cash account. This holds the policy intact.
Like whole life, cash account funds are available through policy loans and partial surrenders. Because they are a return on the premium, withdrawn funds are non-taxable. However, the cash account must remain full enough to support the cost of insurance. Otherwise, the policy will lapse.
Unlike term life and whole life, universal life is incredibly flexible. It allows you to adjust the death benefit, face amount and periodic premium as needed. There are two main variations of universal life.
Variable universal life (VUL) insurance funnels cash value account funds into various sub-accounts. These sub-accounts are similar to mutual funds and earn interest. This allows the policyholder to invest in stocks and bond markets.
Equity indexed universal life (EIUL) insurance also feeds sub-accounts with cash value funds. However, EIULs grow according to market index performance. This allows the policyholder to capitalize on indexes like the S&P 500 and NASDAQ. However, EIULs are more complex than VULs given SEC rules and regulations.
|Company||A.M. Best Rating||BBB Rating|
|New York Life||A++||B-|
|Mutual of Omaha||A+||A+|