What are the General Life Insurance Types

There are only two general types of life insurance: Term and permanent. Term life insurance is temporary. It is in force only for the specified amount of the term, which can be as short as one year or as long as 30. Once the term ends, the insurance coverage ends. Permanent insurance, however, is in force for life. As long as the policy owner pays the premiums on time, it cannot be cancelled. And, all permanent insurance policies have a cash-building feature that grows tax-deferred over time.

While general life insurance policies have not changed much over the years, insurance companies have expanded the number and kind of products they offer within each general life insurance type. Applicants are always advised to discuss their life insurance needs with a qualified insurance agent. Life insurance agents are regulated by the state or states in which they sell products. They must past a series of exams and they must make sure that the product they recommend to a client is suitable for his or her needs.

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General Term Life Insurance Types

There are three types of general term life insurance: Level benefit, level premium and return-of premium.

Level Benefit Term Life

In general, a level benefit policy pays the same death benefit regardless of in which year death occurs. If the death benefit is $100,000 and the term is 20 years, $100,000 will be paid to the beneficiary whether the policy owner dies in year two or year 12. Premiums on a level benefit policy usually increase as the insured enters each new five-year age band. For example, the premium for an insured between the ages of 45 and 49 will be the same, but it will increase once the insured reaches the age of 50.

Level Premium Term Life

With this general type of term life insurance, the premiums remain the same for the entire term. The death benefit, however, decreases as the term nears.

Return-of-Premium Term Life

The risk of term life insurance is outliving the term. Because term insurance is "straight" insurance, that is, the premium is applied only to the death benefit and not toward a cash-building account, if the insured is alive at the end of the term, the policy ends and he or she has spent the money on premiums and not received anything in return. A return-of-premium policy will return a portion or all of the premiums if the term ends and the policy owner is still alive. The premiums for an ROP term policy are usually more expensive than a level benefit or level premium policy.

General Types of Permanent Insurance

The most common type of permanent life insurance is whole life. Whole life was created to protect a policy owner for his or her "whole" life. There are a few general types of whole life insurance:

Participating and Non-Participating

A participating policy "participates" in the earnings of the insurance company. If there are earnings for the accounting year, a dividend is credited to the cash portion of the account. A non-participating policy does not participate in the company’s earnings. All of the dollar amounts related to the policy like the death benefit, surrender value and premiums are determined at the beginning of the policy and do not fluctuate as long as it is in force.

Limited Pay and Single Premium

The premiums for these two general types of whole life policies are paid differently than others. With a limited pay policy, premiums are paid for a limited amount of time rather than for as long as the policy is in force. For example, an insured may choose to pay premiums for only 20 years. The amount of the premium is then adjusted to reflect the reduced amount of time, based on the actuarial tables the insurance company uses. A single premium policy is purchased with one lump-sum payment. In general, this kind of whole life policy has immediate equity that can be borrowed against or used as collateral. It is often purchased instead of an immediate annuity, as it provides a death benefit and grows tax-deferred.

Level Premium and Intermediate Policies

Just as with a level premium term policy, in general, the premiums for a level premium whole life policy remain level as long as the policy is in force. An intermediate policy offers the policyholder the option of flexible premiums over the life of the policy.

Other Types of General Permanent Life Insurance

Two other types of general permanent life insurance are universal and variable life insurance. Both of these types of insurance offer permanent coverage that cannot be cancelled. Universal life insurance is similar to whole life insurance, but offers more flexibility and an ability to grow faster. It pays a guaranteed rate of return that is established at the time the policy is written.

Variable life insurance involves investments. The policy owner can instruct the insurance company to invest the money in the cash account according to his or her needs. Some account owners opt for more aggressive equity funds while others choose less risky bond funds.

General Life Insurance Tax Considerations

The death benefit that is paid to a beneficiary is normally not taxed at the federal level. However, it's always a good idea to meet with a qualified financial planner prior to purchasing a life insurance policy and naming a beneficiary. For example, some families use whole life insurance as an estate-planning tool. The death benefit normally bypasses probate and is paid directly to the beneficiary.

This is important to the family if the inherited assets exceed the allowable limit. Taxes, including inheritance and property, may then be due. If this happens, the death benefit can be used to pay these. However, if the beneficiary of any general life insurance policy is the estate, the death benefit will be paid to the estate and will then go through probate. This will most certainly trigger a taxable event, even at the federal level.

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