Term insurance provides protection for a specified period of time or “term”. It pays the chosen death benefit if the insured dies during the specified term. This is the most affordable type of life insurance. Most people are surprised to learn how low the premiums can be. Some term insurance allows for “conversion” after a certain number of years. Simply put, you have the option of converting your term coverage to another form of protection without having to qualify which is important if you develop medical problems.
Term insurance is often purchased in amounts high enough to cover mortgages and other bills in the event a person’s death would cause financial hardship on another. That hardship may take the form of home foreclosure, vehicle repossession or bankruptcy. Term Insurance should, definitely, be considered if you’re providing a home for a child, spouse, parent or someone else. It should, also, be considered if you have any dependents who rely on your income.
Whole Life may be referred to a “permanent” insurance because it is designed to last your “whole life”. Premiums are higher than Term Insurance, but this type of protection builds cash value. Cash value is built at a set rate and may be borrowed against or used to pay premiums in the future. Alternately, cash value may be left alone to provide additional income later on.
Whole Life is sometimes purchased as a strategic savings vehicle. It may, also, be purchased at extremely low rates for children. The goal in doing so is to not only have insurance in case of a catastrophe but to have a low-cost, high benefit plan to pass over when the child becomes an adult. This same Whole Life policy can, later, provide income when the child retires making it a wise investment.
There are several ways to buy Whole Life protection including:
- Paid Up – paying monthly premiums until the death benefit is paid out which may occur upon death of insured or in the event the insured outlives the policy maturity date, usually age 65 or 100.
- 10 or 20 Pay – the option to pay off the policy by paying equal premiums over a 10 year period or 20 year period. Either of these options will allow a policy to be paid in full for less than
- Single Premium – paying the policy in full up front. The single premium paid up front will purchase a larger death benefit than the actual amount paid.
Final Expense vs Guaranteed Issue
Sometimes called Burial Insurance or Pre-Need, Final Expense differs because it can be used to cover other bills and outstanding debts in addition to funeral home charges. Coverage amounts vary but usually are no more than $50,000, depending on the plan. The average cost of a burial with funeral services is between $8000-$10,000. The average cost of cremation is anywhere from $500-$4000+ and that may or may not include the funeral services. Social Security will pay recipients a lump sum of $255.
Many Final Expense plans are Guaranteed Issue which means you will not be turned down because of your health. Because of this, you will not be asked to submit to a medical exam. Most Guaranteed Issue plans do not ask medical questions, but you may find that answering just a couple of questions may save you money in the form of lower premiums.
Like other life insurance policies, age and smoker status are factors in determining rates. You may here the terms, “Level Benefit” or “Graded/Modified Benefit”. Level Benefit means there is no waiting period for payout. Graded or Modified Benefit means there is a waiting period, typically 2 years, before the plan will pay the full death benefit. With Graded/Modified plans if you die during the waiting period, premiums are returned. Level Benefit plans will likely have lower premiums than Graded/Modified Benefit plans. If you are interested in Final Expense coverage, you should look further than the plans advertised on television and offers sent in the mail.