Welcome back to our discussion about life insurance, where we finish outlining the different types of life insurance as well as other basics.
Variable Life Insurance
Variable insurance is a type of permanent life insurance that has an investment aspect. This type of policy has a cash value aspect that is invested in sub-accounts. Those sub-accounts act like a mutual fund. A mutual fund is a pool of money that the manager invests in stocks, bonds, and money markets. This type of policy is the only time that has this type of investment opportunity. The cash value will fluctuate based on how the investment sub-accounts grow or drop.
Variable Universal Life Insurance
Variable universal life insurance is a combination of 2 types of permanent life insurance. It has the flexibility of the universal life insurance policy, but the investment opportunities of the variable life insurance. When you separate the savings or investment part and the death benefit parts of this life insurance type, the risk falls on the insurance policyholder. The policyholder might have to pay higher monthly premiums to cover the cost of the insurance and rebuild the cash value.
Survivorship Life Insurance
This type of life insurance is a policy that covers two individuals. This policy only pays out after both people have passed. So the second policyholder doesn’t receive any money when the first policyholder dies. These types of policies are much easier to qualify for than others. That is because the life insurance companies are less worried about the health statuses of the policyholders.
Life Insurance Payouts
Other than the types of life insurance, one of the most common misunderstood life insurance basics is the payout. Life insurance companies pay the policy out to beneficiaries when a policyholder dies. The beneficiary will need to file a claim to the insurance company and then submit a copy of the death certificate. If there are multiple beneficiaries, the plan will lay out how the payouts will work. There are 6 main life insurance payout options:
- Lump-Sum– This is the simplest form of a payout. It would be a single deposit from the insurance company
- Installment Payments– This is where the life insurance policy will pay out a percentage over a number of years, such as 20% over a five-years. The beneficiary usually earns interest on the unpaid amount while the insurance company holds it.
- Straight Life Income– This is when the insurance company will pay out the policy to the beneficiary over the rest of their life. No matter how long the beneficiary lives, the amount will be paid out on a monthly, quarterly, or annual basis.
- Life Income with Period Certain– If the beneficiary dies, this payout option ensures that for a period of time a payment will be made, such as for 20 years after the death of the policyholder.
- Joint Life with Survivorship– This payout option is based on the lives of 2 people and will continue paying as long as one of them is alive. A period certain payout can be added to this payout option.
- Interest Only– This option lets the insurance company keep the insurance amount and the beneficiary receives the interest generated from the principal amount of the policy.
By The Numbers
- 54% of American adults have life insurance
- Most financial advisors would say to have 10-15x your annual income in life insurance
- 40% of those insured wish they would have bought their policies at a younger age
- Women typically pay 1/3 for life insurance versus men.