Avoid agents who sell you term life who don’t tell you it will expires in the future even if you’re still alive. Similarly, avoid agents who don’t tell you about ‘black out’ waiting periods for guaranteed issue whole life policies.
Another common trap to avoid is not being aware of a black out period when purchasing guaranteed issue whole life insurance. Asking a life insurance agent if such a black out period exists is very important since many guaranteed issue policies require a waiting period of two or three years before the benefit will be paid if the insured dies. Also, many guaranteed issue policies may have a provision that offers a return of all premiums paid during the black out period, and many will add an additional 10% to the premiums paid in the event that the insured dies within the blackout period.
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Life insurance comes in many varieties. At the more basic level, life insurance is generally broken down into two main categories:
- Term Life
- Whole Life
Beyond these basic classifications, however, there is a seemingly endless number of variations. These many versions exist to solve different types of needs and problems. Life insurance is not a product where one solution works for all situations.
Some of the most common types of life problems life insurance solves are short term needs and permanent needs.
Short term life insurance that expires often prior to death of the insured is referred to as ‘Term Life’. It exists only for a ‘term’, or it ‘terminates’ at a specified, agreed upon date in the future.
Concerning short term needs, one of the most common examples is to buy life insurance to pay off the mortgage. In the event of the passing away of an insured during the term that the policy is in force for, the beneficiary will be paid the benefit stated in the policy. Usually the insured is a primary income earner in the household. That way the risk of loss of life for a breadwinner is transferred from the family to the insurance carrier. The idea behind such a term policy is often for ‘mortgage protection’ insurance. That way the surviving family or loved ones will not loose their home if the insured primary income earner(s) die while the term policy is in-force. It’s difficult enough to loose a loved one, but to then be thrown into financial chaos as a result is a secondary risk that can be avoided or reduced through term life insurance. The thing to remember with term insurance is that the benefit will only be paid to the beneficiaries if the insured dies during the term that the policy is in force. If the insured outlives the policy no benefits are generally paid. Similarly, term life policies are often bought to insure against college tuition for dependents, or other debts of significance.
‘Whole Life’ or ‘Permanent’ life insurance is the other main category. As it’s name suggests, ‘Whole Life’ insurance is a financial product that remains in force for the whole entire life of the insured.
Many people wish to pay off funeral & burial expenses, debts, or pass along a legacy to their surviving loved ones when they die. Unlike term insurance that insures against death if insured dies while the policy is in-force, whole life insurance is designed with an expectation of the insured dying while the policy is in-force. Instead of depending on ‘if’ the insured dies while the policy is in-force, the question is more of ‘when’ it will occur while the policy is in-force.
Regardless of what type of policy you have, if the policy is dropped by the owner or lapses due to non-payment of premiums there will be no obligation of the insurance carrier to distribute benefits for term or whole life. It should be mentioned that there may be exceptions – especially for whole life since it retains what is referred to as cash value, or other riders or provisions for term policies, but generally speaking, the policy must be in-force at the time of the insured’s death in order for beneficiaries to receive benefits.
After knowing if a policy is meant to solve a term or a permanent problem, there are further types of policies that exist within those main categories. Whole life insurance in particular comes in a wide variety of versions including Universal Life, Final Expense, and Guaranteed Issue. These are some of the more common types of offerings in the whole life market.