Howdy howdy. I know it’s been around a month since my last post and I promised this time would be different. Well, I’ve been busy saving families financial lives so this took a bit of a back seat. Anyways, on to the post!!!

This post will be about the bare bones basics. No frills. In later posts, I’ll get into the differences between specifics and will even include graphics demonstrating various concepts. Don’t laugh at them, I’m a programmer/money coach, not a designer.

When dealing with Life Insurance, there are so many different kinds that it becomes easy to get confused. The insurance companies LOVE it that way. The problem is, many of the agents also get confused. Lets see, we have Credit Life, Mortgage Life, Accidental Death and Dismemberment, Level Term, Whole Life, Variable Life, Universal Life, Variable Universal, Return Of Premium, Permanent, Annually Renewable, Decreasing, etc. Actually, I think that is all of them. If I missed one, put it in the comments.

When you break every single one of these down to the bare bones basics, they are all 1 of 2 kinds of policies. Annually Renewable Term or Decreasing Term. What a minute, we have 12 listed policy types and they are all varieties of 2 of them? Yup. So why are there so many different varieties, well, profits. In general, the more complex the policy, the greater the profits.

Annually Renewable Term

This is probably the most common type.  Usually found in group, level term, and most types of cash value policies.  Every year, the policy renews and the price increases based on a schedule in the policy.

Decreasing Term

The face amount of the policy decreases every year but the premium stays the same.  It is typically used as mortgage insurance and in whole life policies.

It’s important to know these 2 policy types since they are the basis for the rest.  I’ll go over the basics of them now and expand on them in later posts.

Credit Life, Mortgage Life, Accidental Death and Dismemberment

You should avoid these types of life policies.  They are pure profit makers for the insurance companies and don’t benefit your family one iota.  Credit Life is usually bought on a monthly basis by the lender (on your behalf, that you pay for) to cover the current balance.  The beneficiary, the lender. Mortgage Life is typically bought and paid for when you get the mortgage.  Many times, it is rolled INTO the note so you don’t have to pay for it out of pocket.  Several issues with this.

1. It’s typically paid up for 30 years based on expected balance.
2. If rolled into the note, you now pay INTEREST on the premium.
3. If the note is paid off early, unless you make an effort for it, you typically don’t get your unearned premiums back.

AD&D is the worst of all.  Many policies have very strict conditions for their death benefits hence why it is the cheapest of all.  General scenario on how most pay out.  You get in a wreck, die BEFORE the paramedics get their, death by accident, policy pays.  If you are alive when the paramedics get there, you get in the ambulance/care flight and die either en route or at the hospital, it typically wont pay.  Why? Simple, you died due to COMPLICATIONS as a result of an accident, not DUE to the accident.  Splitting hairs right? Now you know why it’s so cheap.

Level Term, Return Of Premium

Both of these are variants of ART (annually renewable term).  Level term is exactly as it sounds, ART with a level period.  You die while policy is in force, it pays.  ROP (return of premium) is a variant of Level Term.  It’s a rider added on that allows you to get your premium back at the end of the term.  Typically the first 5 years, you would get $0 back.  After that, it’s a graduated percentage till the policy term is up.  And even then, you still may not get all of the premiums back.

Now, ROP sounds great doesn’t it? You make it to the end of the term and get all/most of your money back? What they don’t tell you is that you actually LOST money in the process.  How? Inflation.  The reality is in year 6 you start seeing a balance.  That balance grows interest.  But the interest and 5 year loss equals out to an actual interest of 0% and an effective interest of -4%!  Yea, that’s a great deal.

Permanent

This is a tricky one.  This can be virtually any kind of policy.  It can be a term policy that expires at age 95, it can also be a cash value type policy . This is now a more universal term than anything.  Basically, any policy that expires/matures between ages 80 and 120 can be technically be classified as one.

Whole Life

This is decreasing term with a savings account.  The policies are designed so that when they mature, the cash value that is built up equals the face amount.

Variable Life

This is an interesting policy.  It has a minimal death benefit, if you pay for it.  With this kind of policy, your face amount changes with the underlying investments.  Assuming you decide to use investments.  When the market is good, your face amount is usually great.  When the market is down (like as of this writing), your face amount is down.  You pay the same premium either way, and may get a rate hike if the cash value drops to $0.

Universal Life/Variable Universal Life

A universal life policy is an evolution of whole life.  Instead of being DT (decreasing term), it’s ART.  You get a minimal death benefit with a cash account that is invested in the market.  You have the flexibility to decide the premiums and the coverage while the policy is in place.  A variable version adds the ability to determine a wider variety of investments for the cash account.  On both of these, you typically have 2 options.  Option A and option B.  Option A, your beneficiaries get the face amount ONLY.  Option B, you pay MORE so your survivors can have both the face amount and the cash.

This is just a rough overview.  I’ll spend more time on each one individually here in the coming days/weeks/months/years.