Non-traditional Types Of Life Insurance Policies
Life insurance has come a long way from its early days more that 400 years ago
. Starting out as plain vanilla term life insurance and then plain vanilla whole life policies there are now several variants to these two traditional policy types. The beauty of life insurance products is that new (lets call them non-traditional) policy variants are built upon these two traditional policies, and keep evolving over time based on changing social and economic needs. Lets explore some of the non-traditional whole life and term life policies.
Non-traditional whole life policies
Basic whole life policies come with a cash value component that is completely managed by the life insurance company. The life insurance company controls the amount that would go into the cash fund and the percentage of returns. Whole life policies have a transparent fee structure, with premiums remaining the same throughout the life of the policy. Over time policyholders felt the need for more control over the cash value component of the policy and this need evolved into new products. Universal life and Variable life are two such non-traditional whole life policies.
Universal life policies came about in an attempt to offer the insured more choice and flexibility than traditional whole life policies. This translates to an adjustable death benefit, flexible premiums that would be adjusted against the cash value, open and transparent fees, lower premiums than whole life, etc.
Variable life policies are similar to universal policies. They offer more flexibility than universal policies because here you even have control over where the cash value gets invested. You can also make changes in the structure of your cash value and death benefit several times a year. You also have the flexibility to choose the type of investment they are going into like stocks, bonds, etc. However, they are risky and the insured has to have a good knowledge of the financial markets.
Non-traditional term life policies
Traditional term life policies are straightforward. You buy a policy for a certain number of years, you pay (usually fixed) premiums on it and if you die during the term, your beneficiaries are paid the policy amount. If you survive the term, the coverage expires and you will have to buy life insurance all over again if you need it. Term life is very economical. The rigidity of traditional term life insurance
made many perceive it to be less valuable than whole life policies. However, term too has non-traditional variants that make the policy as attractive as whole life policies.
Term life policies with the option to convert or renew: even though this is not a term life variation, the options to convert to whole life or renew your term policy when it ends have revolutionized the very basis of term life. An extendable term makes policies more attractive to those who are uncertain about their financial obligations in the future. Such policies cost a bit more than traditional term policies, but they dont require you to take a physical exam when the term is renewed or extended.
Return of Premium term life policies Term lifes answer to whole lifes cash value has come in the form of a variation that returns all the insureds paid up premiums if he survives the term. This bonus at the end of the term has many queuing up for an ROP policy. ROPs are more expensive than term, but nevertheless gaining popularity.
Life insurance is a personal choice
Contrary to popular perception, a life insurance policy needs to be bought based on a persons needs, and not on the basis of how popular they are. Term life
is meant for people who have a lot of financial obligations, while whole life and its newer non-traditional avatars are great for those who are looking for tax-planning or estate-planning benefits, who have an appetite for risk, or those who are looking for retirement benefits.
It is up to us to assess our needs and choose the right policy wisely.
by: Denise Mancini
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