Signing up for a life insurance policy can be a smart purchase. Use the following guide to learn about the different types of life insurance policies, how they work and why you may want to consider purchasing a life insurance policy.
How does life insurance work?
A life insurance policy is a contract between you and an insurance company. You agree to pay the insurance company a set amount of money each month (or year) for a predetermined length of time. If you pass away while the policy is still in force, the insurance company would typically then make a payment to a beneficiary of your choosing, most often a spouse, sibling, child or grandchild.
What can life insurance be used for?
Your death can leave your loved ones with a financial burden. Here are some potential expenses your beneficiaries could face.
- Funeral expenses can cost several thousand dollars.
- A surviving spouse may not be able to afford to continue paying rent or a mortgage without the help of your income.
- Your children may have difficulty affording college without your income.
- Your spouse may be left responsible to pay for your end-of-life medical expenses.
- Shared debts such as credit cards or car payments can be inherited by a spouse, especially in a community property state.
- In a community property state, even unshared debts can become the responsibility of a surviving spouse.
A life insurance policy is designed to protect against such situations. The last thing you would want is for your loved ones to experience a financial hardship after you’re no longer around to provide for them.
Who should consider a life insurance policy?
As a general rule of thumb, anyone who has someone depending upon them financially may want to consider life insurance. Some examples include:
- A married or otherwise cohabitating person who is the sole or primary provider of the household.
- A parent with children who are not yet financially independent.
- A stay-at-home parent or homemaker. The services this person provides, such as cooking, cleaning or child care, can all carry a monetary value that may need to be replaced if that person passes away.
- Homeowners with a remaining mortgage balance or those with other outstanding debts.
- People with elderly parents who currently or may eventually require financial assistance.
- The parents of a child with a disability who may need financial support during adulthood.
- Workers who have life insurance as part of an employee benefits package, but feel that the coverage amount provided is insufficient for what they need.
- Business owners or partners who could use a life insurance policy as a buyout or contingency plan for the maintenance of their business in the event of death.
Even single people with no financial dependents may want to consider life insurance to help protect loved ones from shouldering the cost of a funeral. Plus, life insurance is generally less expensive the younger you are, so locking in a lower rate while you’re still young can potentially work to your advantage if you do get married or start a family later in life.
Types of life insurance policies
There are several different types of life insurance policies, all of which are designed for different needs and financial situations. Life insurance policies can be generally placed into one of two basic categories: Term or permanent life insurance.
Term life insurance
A term life insurance policy is a temporary form of coverage that can generally last for somewhere between 10 and 30 years. If the insured individual were to die during this time, a payout would typically be made to their beneficiary or beneficiaries. If the individual were to live past the end date of their coverage, the policy would simply expire in most cases.
There are several different types of term life insurance policies, as well as a number of different policy variations and features.
- Guaranteed level
Perhaps the most common type of term life insurance, these policies feature fixed rates over the life of the coverage, so the cost of your premiums will never go up.
- Annual renewable
Annual renewable term life policies expire and renew again on an annual basis, allowing for short-term coverage with less of a long-term commitment.
- Decreasing term
Decreasing term life insurance gets its name from the death benefit that gradually decreases over time. The idea behind this type of policy is that one’s debts and need to financially support others may decrease over time.
- Increasing term
The death benefit of an increasing term life insurance policy gradually increases with each year. The strategy behind an increasing term life insurance policy typically centers around how a young family’s financial responsibilities may grow over time.
- Return of premium
If a life insurance policy features a return of premium, the premiums that the insured individual has paid will in many cases be returned to them if they outlive the length of the policy coverage period.
Financial needs may change over time, and a lot can happen over the course of 20 or 30 years. Convertible term life insurance allows the insured individual to convert their policy to permanent life insurance policy in the future if they so choose.
Permanent life insurance
Permanent life insurance can offer coverage for the rest of the insured individual’s life. As long as you continue to pay your policy premiums on time, a permanent life insurance policy may help ensure that your beneficiary will receive a payout when you pass away.
Permanent life insurance policies can include some extra features not often found in term life insurance, such as the opportunity to build cash values.
Like term life insurance, there are different types of permanent life insurance policies from which to choose.
- Whole Life
One of the most common forms of permanent life insurance is whole life. A whole life insurance policy covers the insured for the rest of their life and can offer consistent and predictable premium payments and cash value accumulation.
- Universal Life
Universal life insurance builds cash value over time to offer the insured individual a savings element that can be borrowed against if needed. A universal life insurance policy may provide additional flexibility for how the policy’s savings components are invested than with a standard whole life insurance policy.
- Variable Universal Life
Variable life insurance features an investment option where policy owners can receive dividends based on the company’s performance.
- Final expense
Sometimes, only a nominal amount of life insurance may be needed to help cover funeral expenses and end-of-life medical care. A final expense life insurance plan can be a small policy designed just for that reason.
- Guaranteed issue whole life insurance
With age and health status often being two major dictators of life insurance qualification, older adults may find it difficult to get approved for coverage. Guaranteed issue whole life insurance requires no medical underwriting and guarantees acceptance to applicants within a set age range. Coverage is subject to receipt of payment and verification of identity as required by law and is effective upon receipt of policy.
Buying a life insurance policy
There are three steps that can be critical when buying a life insurance policy:
- Identify the cash and income needs for those who would be financially burdened by your death.
- Calculate how much life insurance coverage you need and how long you may need it for.
- Determine which type(s) of life insurance best suits your needs.
An AIG-appointed life insurance agent can help you determine the life insurance policy option that’s best for your needs. Call 855-840-2335 to work with an agent who can help you find a life insurance policy that will provide your loved ones with the protection they deserve.
Agency services provided by AIG Direct Insurance Services, Inc. ("AIG Direct"), CA license # 0B57619 and AR license # 0100105378, a subsidiary of American General Life Insurance Company ("AGL"), Houston, TX and an affiliate of The United States Life Insurance Company in the City of New York ("US Life"), New York, NY, all members of American International Group ("AIG").
Policies issued by: American General Life Insurance Company (AGL), Policy Form Numbers ICC16-16901, 16901, ICC16-16900 and 16900 except in New York, where issued by The United States Life Insurance Company in the City of New York (US Life), Policy Form Numbers 16901N and 16900N. Issuing companies AGL and US Life are responsible for financial obligations of insurance products and are members of American International Group, Inc. (AIG). Products may not be available in all states and product features including rates may vary by state. All guarantees and benefits of the insurance policy are backed by the claims-paying ability of the issuing insurance company. They are not backed by the broker/dealer and/or insurance agency selling the policy, nor by any of their affiliates, and none of them makes any representations or guarantees regarding the claims-paying ability of the issuing insurance company. ©2018. All rights reserved.