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Is all life insurance the same?

Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted...

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella...

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Reviewed byDaniel Walker
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UPDATED: Apr 11, 2020

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No, all life insurance is not the same. There are many two main categories of life insurance and there are many differences within those categories as well as many variations depending on the company offering the life insurance.

Further, there are different ways to manage your life insurance as well as different limits that can be applied on a life insurance policy. Simply enter your zip code above to start getting life insurance rate quotes now!

Term Life Insurance

Let us first begin by describing the more basic of the two options: term life insurance.

This type of policy is similar to what it sounds like. It is offered for a certain term or period of years (typically in a range of 10 to 30 year policy). Because it does not guarantee a benefit payout, this is the more simplistic and thus usually cheaper of the two types of policies.

Term life insurance will only payout benefits to the named beneficiaries if the insured dies within the period term. If the insured dies a day after the policy expires, the beneficiaries will not receive any payout.

However, if the policy lapses after the insured passes away, the beneficiaries will most likely still receive a payout. While the term life insurance offers a death benefit payout (which you can tailor to fit your family’s needs), it does not offer a cash value account within the policy. Online life insurance quotes for term coverage can be very competitive.

Whole Life Insurance and Permanent Life Insurance

The next type of life insurance policy is a permanent life insurance, or most often referred to as whole life insurance. This type of policy is also similar to how it sounds- it is purchased with the intention of lasting the insured’s “whole life” until they pass away and then the beneficiaries will receive their payout.

Aside from the guaranteed payout that your beneficiaries receive (assuming all payments are continually made), another benefit to the set-up of the whole life insurance policy is that there is a cash value account that gains interest as you make payments to your policy.

Once the cash value account of a whole life policy has enough in it, you have the option to use it for premium payments on your policy. Although this can ultimately reduce your death benefits, it is a good way to make consistent payments to your policy. Another common type of whole life policy is referred to as a cash value policy. There are also additional tax benefits to this cash account.

First, your interest gains cannot be taxed as income (unless the account is closed and you did not pay back the “loan”). Second, if the beneficiary named to receive the payout is a specific person, the payouts can be excluded from estate taxes. Third, your beneficiaries are not required to pay income taxes on the death payout either.

Lastly, you are not required to pay taxes on the interest gains that you may receive within the cash value account, even if you use that as a loan to yourself to pay your life insurance premium. The only instance in which you may have to pay the taxes is if you ultimately end up canceling your policy. You can read more about the differences between term life and whole life here.

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Other Life Insurance Types

There are also other types of life insurance policies considered under the umbrella of whole life insurance, such as a universal life insurance plan. This type of policy offers more flexibility with the payments than a whole life policy does.

You may choose to pay more than required, less than required, or no payment at all. This is different than a consistent whole life policy which carries one premium per policy term.

As with most types of insurance, life insurance is complex, has many different types of choices, limits, and payouts. It is best to consider a few items before comparing policies and companies. First, decide whether term or permanent life insurance fits your needs better. Once you have made this decision it will be much simpler to search companies and policies.

Then think about what employer benefits you already have, what other retirement funds you have set aside, and what gap that leaves for your family and loved ones.

Use that information to consult with a licensed insurance agent or, even simpler, to search on a comparison website like this one here. It will then depend on what type of payment will be manageable, what options a cash value account give you, or even if a term policy will fit your family’s needs for the best shorter term option.

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