The Different Varieties of Life Insurance
Life insurance policies vary a lot. Knowing what kind of policy you are dealing with helps you to figure out whether there's a death benefit available, whether that benefit has been reduced by loans taken against the policy, and whether the benefits are limited to a specific use.
Although the policies seem to vary in endless, specific, ways, there are a few basic varieties within all of the chaos that can help you sort them into basic groups.
Term Life Insurance covers the insured person for a specific period of time, like 20 years. If the insured person dies within that term, the policy pays out the death benefit to the named beneficiairies. It's nice and simple. There's three ways it may not work as planned: if the life insurance company determines that there's been fraud (such as lying about something important on the policy application); if, in some policies, the insured committed suicide; or if the insured died within two years of purchasing the policy, a company may refuse to pay the benefit, or launch in independent investigation of the facts before paying the benefit.
Whole Life Insurance covers the insured person for that person's entire life. Over time, these policies build up what's called 'cash value.' The insured person can borrow against this cash value if they need cash. These loans may be paid back before a person dies, but if not, these loans can reduce, or even eliminate, the death benefit due. If you are dealing with a Whole Life policy, you'll need to ask a few questions:
- Was the policy paid up and in force when the insured died?
- Did the insured ever borrow against the policy?
- Did the insured cash out the policy?
Universal Life Insurance is a kind of Whole Life Insurance, but the cost of the annual premium and/or the death benefit available varies depending on the performance of the financial markets over time. If you find a Universal Life policy, you'll need to ask the same questions listed above for Whole Life, and you'll need to find out if the policy was converted, at some point, into another kind of policy (like a term policy) because the insured stopped making payments at some point.
Accidental Life Insurance is a kind of policy that covers the insured if they die in a particular (usually gruesome) kind of way. These are often offered through work, to cover death while traveling on company business. If the decedent owned this kind of a policy, you'll want to know if their form of death 'qualifies' for the available benefit.
Mortgage and credit card insurance policies often come with home loans and credit cards, and are usually designed to pay off balances at death. Usually, the payment goes directly to the loan holder, so they can be helpful to the estate overall, but won't go to particular beneficiaries.