When looking for life insurance, it’s important to consider the living benefits part of the policy. While cannot always predict what life will hold for health, many people plan ahead through this aspect of life insurance. Traditional life insurance policies only offer a fixed amount of money (also called the “annual benefit amount”) for a pre-determined period of time, after the policyholder dies.
There are several types of life coverage options. The most common one is called “defined benefit” life coverage. The term refers to the fact that after a policyholder dies, the insurance company pays a certain amount to the family of the policyholder. This amount usually increases throughout the policy’s term.
Other types of coverage include “traditional”premium paid” coverage; the “endowment” type; “risk-free” coverage; and the “investment-type” policy. Each type of coverage offers its own advantages, as well as disadvantages.
The premium paid type of coverage is the most common, and may be the simplest type of coverage. In this type of coverage, the insurance company only pays the insurance premium up to a pre-determined amount. The cost of the coverage continues to increase until the policyholder’s death, at which point the policy automatically stops and the family receives the policy’s endowment value. Premium paid coverage may not pay benefits during an insured’s lifetime. It also has a limited “stop date,” or a period of time before the policy stops paying benefits, for a specific number of years.
The traditional “risk-free”investment-type” options of life coverage have similar benefits but do not involve risk. For example, in risk-free life coverage, the insured pays a monthly premium until the policy ends, and then the insurance company gives the beneficiary a certain amount of money. The policyholder’s property and financial investments are typically tax-deferred. However, both these options require the insurance company to invest the premiums and benefits in a manner that ensures their success. Therefore, the insurance company must continue to invest in the policy so as to ensure a return on investment.
In contrast, premium-paid and traditional insurance policies, like endowment and investment-type options, do not guarantee a guaranteed return on investment. Instead, they allow the insurance company to earn the “live benefits,” or income earned from the insurance policy while providing income for the policyholder’s beneficiaries. If the insured is unable to work or make payments during the insured’s lifetime, the policy’s endowment value would continue to accumulate, and the insurance company would continue to earn an amount of income.
Most of the traditional forms of coverage do not require that beneficiaries receive any cash benefit upon the insured’s death, and therefore, they are referred to as “periodic insurance.” The benefit is generally invested in order to pay benefits in the case of an insured’s untimely death. A policy may be changed to continuous insurance if the insurance company determines that the investment merits it.
Finally, the “risk-free”non-contributory” form of life coverage is the least expensive form of coverage, as it does not require the insurer to invest any of the insured’s estate. assets. It also is more affordable than “periodic insurance” because there is no cost for investments, maintenance of an account for benefits, or investment management of the policy.
The “risk-free” option is the most common type of “continuous insurance” today. Because it allows the insurer to earn “live benefits” without requiring any investments, the insurer does not have to continue to invest the benefits in order to generate an income that will cover the expenses of the policyholder’s insurance policy.
Policyholders are generally able to “load”pool” the policy with other policies with varying levels of coverage. This allows them to have greater “risk-free” flexibility.
Life insurance with living benefits can provide individuals and families with financial protection and peace of mind during a difficult period. Life insurance is a complex undertaking, but essential part of financial planning.