What Type of Life Insurance do you need?

Life insurance is a very broad topic. Fully understanding its technicalities is a very tedious task. In IMG, we try to make it as simple as possible that all people from all walks of life can understand. We stick to the basics: understanding its purposes, how to fully determine or compute one's insurance needs and understanding what type of insurance that will fit to your needs. Here, let's tackle the different types of life insurances:

Understanding different types of life insurance is a crucial part of in budgeting
Understanding different types of life insurance is a crucial part of in budgeting 
There are only two types of life insurances: (1.) Term Insurance and (2.) Cash Value Insurance

1. Term Insurance

the oldest and traditional type of insurance where the policy holder is covered within a specified period or policy term. If the policy holder dies within the specific period and the policy is active, then a death benefit will be given to its beneficiaries. After the "term" period, it is up to the policy holder whether to renew or not. It is usually the cheapest type of insurance. Some refer to it as temporary insurance because of its term or set period of coverage.

Types of Term Insurance Include:

1.1. Annual Renewable Term
Coverage is for a one-year term, renewable every year with a higher price. It costs much less when you're young but will be very expensive when you are old. The price generally goes up every year, but still can be very cheap compared to the other types.

1.2. Level Term: 5, 10, 20, 30 years
The amount paid for coverage is the same or "level" for the term (for example, 5 years). However, at the end of each term, the cost increases, typically much more than Annual Renewable Term. The insurance company averages the cost of insurance for the term.

Term insurance policies may also have an added benefit and may cost higher depending on the person's needs or preference:

- Return of Premium Term:
The policy will return the premium paid for the coverage if the insured survives the policy's term.
- Renewable Term
It is also important to note that some term insurances may not be renewable. With the added benefit of renewability  it means you are guaranteed to renew the term for the rest of your life regardless of your health condition. With non-renewable term, they may be cheaper but you may not be able to renew unless you have good health.
- Convertible Term
Convertible insurance policies allow the insured to convert to another policy, usually from term to permanent life, regardless of insured's health. Most often, this conversion privilege applies to employees who have Group Term Life when they end their employment.

2. Cash Value Insurance

This is normally called permanent life insurance. This type of insurance is a combination of term insurance + cash value. This type of insurance is created for people who are savings and investment-driven and would want to receive a certain cash benefit after a number of years.

Types of Cash Value Insurances:

2.1. Whole Life Insurance
It is the original and oldest form of cash value life insurance. Instead of paying just the cost of insurance, you pay higher premiums. The difference between the cost of insurance and the premium goes into your cash value. The cash value compounded with interest built up in the early years will pay for the higher cost of insurance in the later years, so the policy can last a whole lifetime. Typically the whole life policy matures at age 100, when the insured person still lives at that age, he will receive a corresponding cash benefit.

Whole life insurance may require you to pay a regular premium up to age 99 or pay a premium for a specified time (example 10 years to pay) but may cost higher. The latter may require you to pay additional premium even after the specified number of years depending on the cash value if it is sufficient to pay the cost of insurance.

2.2. Endowment
Is another type of cash value insurance where the policy holder will be paying for a specified number of years (usually 10, 15 or 20) and is covered until a certain maturity period (usually at age 60 or 65). The premium however, may be way expensive compared to the other types of cash value insurance because of its early maturity. Upon maturity the insured person will receive its cash benefit if he still lives or his family will receive its death benefit in case something happens to him prematurely.

2.3. Universal Life
Universal life insurance is almost the same with whole life insurance except for its flexibility. You can change your premium, by paying more on one moth or less the next, or you may even skip a few payments as long as the cash value inside the policy is still enough to pay for the cost of insurance.

2.4. Variable Universal Life (VUL)
The insurance industry has incorporated some investment vehicles to traditional insurance products, thus, a VUL is a combination of an insurance product and an investment product such as a mutual fund. By combining investments and insurance, clients may be able to capitalize on the potential growth of the market while also benefiting from the tax advantages of life insurance.

The difference between permanent life policies is that the extra cash in the VUL is put into a separate account usually invested in securities instead of the insurances policy's cash value. The policy owner is responsible for the investment choice of his account depending on his risk appetite. With VUL, you have flexibility of premium and flexibility of cash value and death benefit.

With all these different types of life insurances, it can be very confusing and thus it boils down to understanding its purpose and needs. That's why in IMG, we believe in empowering people to becoming their own financial experts and that one may understand his or her own personal needs.

Source: Saving Your Future Book, World System Builder, 2015

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