Life Insurance: Term vs Whole

• Life insurance policies have different types, functions, and benefits

Term Life Insurance

• Coverage is for a specific period, such as 10, 20, or 30 years
• A death benefit is paid if the insured dies during the term
• There is no cash value component.
• Premiums are lower compared to permanent insurance
• The death benefit is paid in a lump sum or another chosen settlement option if the insured dies during the policy term
• No payout occurs if the policyholder outlives the term, unless the policy includes a return of premium rider, which refunds some or all premiums paid

Whole Life Insurance

• This provides lifetime coverage as long as premiums are paid
• Includes a cash value component that grows over time.
• Premiums are fixed, and the death benefit is guaranteed
• The death benefit is guaranteed and paid out in a lump sum or other settlement option when the insured dies
• Policyholders can borrow against the cash value or surrender the policy for its cash value while alive; If a loan isn't repaid, it reduces the final payout

Universal Life Insurance

• Offers flexible premiums and death benefits
• Cash value accumulates and earns interest
• Policyholders can adjust premiums and coverage amounts
• The death benefit is flexible and paid to beneficiaries upon death
• Policyholders can withdraw or borrow from the cash value while alive
• The policy may lapse if the cash value is depleted due to withdrawals or missed payments unless enough premiums are paid

Variable Life Insurance

• Cash value is invested in various sub-accounts, like stocks and bonds
• Death benefit and cash value fluctuate based on market performance
• Policyholders assume investment risk
• The death benefit varies based on investment performance but has a minimum guaranteed amount
• Policyholders can access the cash value through loans or withdrawals, but poor investment performance can reduce the benefit

Variable Universal Life (VUL) Insurance

• Combination provides universal life and variable life insurance features
• It offers flexible premiums and investment choices for cash value
• There is potential for higher returns, but also higher risk.
• Similar to variable life, the death benefit fluctuates with investment performance but can be adjusted by the policyholder
• Withdrawals and loans are possible but depend on investment returns, Poor market performance can reduce both the cash value and death benefit

Final Expense Insurance

• These are small whole life policies designed to cover funeral and burial costs
• The face value is lower, for example, $5,000 to $50,000
• Typically easier to qualify for
• A small lump sum death benefit (e.g., $5,000–$50,000) is paid to cover funeral and burial expenses

Standard Policy Provisions

• The following outlines the standard provisions, additional benefits, and customization options available in life insurance policies
• Entire Contract Clause: The policy and the application together form the full agreement
• Incontestability Clause: After a set period (usually 2 years), the insurer cannot contest claims based on misrepresentation
• Grace Period: A set time (typically 30-31 days) to pay premiums before the policy lapses
• Reinstatement Clause: Allows policyholders to restore a lapsed policy within a certain period
• Misstatement of Age or Gender: Adjusts benefits if incorrect information is provided
• Free Look Period: Gives policyholders a chance to cancel within a set period (usually 10-30 days) for a full refund

Policy Options

• The following provides standard provisions, additional benefits, and customization options available
• Nonforfeiture Options: Applies to policies with cash value
  • Cash Surrender: Policyholder receives cash value and terminates coverage
  • Reduced Paid-Up: Converts policy to a lower face amount with no more premiums
  • Extended Term: Uses cash value to buy term insurance for the same coverage amount
• Settlement Options: Ways beneficiaries receive death benefits:
  • Lump Sum: A full payout at once, which is the default option
  • Life Income: Payments continue for the beneficiary's lifetime
  • Interest Only: Insurer holds funds and pays interest to the beneficiary
  • Fixed Period / Fixed Amount: Payments are spread over a set time or amount

Riders (Optional Add-ons for Extra Coverage)

• Waiver of Premium Rider: Waives premium payments if the insured becomes disabled
• Accidental Death Benefit Rider: Provides extra payout if death occurs due to an accident
• Guaranteed Insurability Rider: Allows policyholder to purchase more coverage without medical exams
• Child Term Rider: Provides life insurance coverage for children of the insured
• Long-Term Care Rider: Uses part of the death benefit to pay for long-term care expenses