I meet with a lot of new clients every week and there are a lot of consumers that really have a vague knowledge of life insurance. I try to explain policy types in easy understandable terms. I find consumers that were “sold” life insurance really didn’t understand what they were buying or worse why they were buying that type of life insurance policy. There are hundreds of life insurance companies that sell thousands of plan types of life insurance. Unless they really have a good knowledge of the life insurance industry, I highly recommend using an experienced life insurance broker that can professionally shop for the best life insurance product at the best price for your unique situation. Also, that will educate the consumer as to why a particular type of life insurance policy over another. That being said, here are some simple scenarios to the different types of life insurance or explaining life insurance 101.
The most popular and original type of life insurance is term. Term life insurance means the policy is temporary. This type provides a face amount for a fixed period of time that can range from annual renewable term which increases premiums every year to the most popular 10-20-30 year terms to now a 35 year term. When you purchase a fixed term amount, like 20 years, it basically means the premium rate the consumer pays is guaranteed for 20 years regardless of changes in health or employment. These are great affordable life insurance policies for income replacement, college funds for young children, paying off debt, paying off a mortgage or even final expenses. In essence, the consumer needs to create an instant estate due to a sudden or premature death. Most life insurance plans can be purchased for a lower affordable premium.
There are also popular term products known as decreasing term. Essentially, the face amount decreases every year the client doesn’t die. Most people would never purchase these plans if they understood them. They are better known as “mortgage insurance” or “credit life”. The life insurance policy face decreases by the client paying down the debt or mortgage every year. The consumer is far better of with a standard term life insurance plan and leaving the difference to their family versus the life insurance company. Also, fully understand final expense or burial insurance before making that purchase. There are a lot of gimmick life insurance plans that the consumer should be very aware of time limits, death claims, increasing face amounts and age limits for cancellation.
The last type of life insurance policies are cash value or permanent life insurance plans. These are better known as whole life, universal life, variable universal life and fixed index universal life insurance. These life insurance plans guarantee a fixed premium for the lifetime of the client. These plans are used more in estate planning, charitable giving strategies and also income replacement as well. There are a lot of tax advantages by investing some money in cash value life insurance plans. Typically permanent life insurance plans are best designed for affluent consumers as well as older clients wanting to have tax deferred cash accumulation vehicles which in most cases can be used later tax free. These premiums with the cash accumulation vehicles will usually be several times more expensive than their term life insurance counter parts.
If you love and care about someone, you need to have the right kind of life insurance. It is the most fundamental building block of a sound financial plan. Term life insurance is the nost affordable product to start by it’s affordibility.
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Tim Wilhoit is owner/principal of Your Friend 4 Life Insurance Agency in Nashville, TN. He is a family man, father of 3, entrepreneur, insurance agent, life insurance broker, salesman, sales trainer, recruiter, public speaker, blogger and team leader with over 25 years of experience in sales and marketing in the insurance and beverage industries.