Whole life, Term insurance, Credit Life & Disability, Burial Insurance, Graded Death or Limited Benefit…..What’s the difference?
Last week we gave some basic information to help you understand auto insurance, today we’ll cover Life Insurance basics.
One thing that tends to be most confusing to people is the term Burial insurance compared to Life insurance. Most burial policies are written in lower amounts in order to cover final expenses, where life insurance is usually higher face amounts and designated for uses not limited to funerals. Other than that, they are basically the same type of policy. Each have a set face amount (death benefit) and both have premiums which don’t change and you pay for life or until a certain age of maturity like 90 or 95, at which time, the face amount is paid to the insured.
In terms of Burial or Life Insurance you may come in contact with a “graded death” or limited benefit policy. What this means is that the policy will not pay full face amount for the first 2 or 3 years. For example, you purchase a $5000 policy with $0 benefits until the policy is 3 years old. These policies will sometimes pay the full face amount if death is due to an accident in lieu of natural causes and most pay a return of premium plus interest if death occurs before the limited time is reached. Others still, offer ‘graded’ or ‘limited’ benefits, meaning a $5000 policy will pay a percentage if death occurs in the first and/or second year and 100% after the policy’s 3rd anniversary date.
On the other hand, Term Insurance is a set face amount with premiums set for a certain number of years (EX: 5, 10, 20). At the end of the ‘term’ you can renew for the same face amount but at a higher premium. Most term policies have a right to convert privilege which means you can convert at any time to a whole life policy with guaranteed issue at the current rates at the time of conversion regardless of health or occupation. Term policies are great for having a lot of coverage during those years you’re paying for a home and/or raising children. However, everyone should have a basic Whole Life policy in force and the younger you are when you purchase one, the better the rates.
Credit Life and Disability Insurance is normally what you’ll purchase in conjunction with a loan. This type of insurance pays the loan note if you become disabled and/or the loan balance in case of borrower’s death before it is paid off. These are normally offered by the financial institute in lieu of an Insurance company, agent or broker.
There are still other types of life insurance policies we’ll discuss in the future (Universal Life, Annuities, Investment and Retirement) but hopefully this post helps you understand the basic types of life insurance policies out there for your benefit.
If you don’t have life or burial insurance, or you’re not sure what you have, let us review your policies and help you figure it out. You can also check our FAQ for more information.
Until next time, take care and remember…. Life is for the living and the right amount (and kind) of insurance can assist your loved ones in continuing to live in the instance of your premature death.
Tommy Curtis and Staff
This material has been provided for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
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