Differences among types of life insurance
Term Life, Final Expense, Whole Life, and Preneed Funeral insurance defined
By Natalie Altieri
If you’ve ever done a Google search for “life insurance,” it probably seems like there are as many types of life insurance as there are companies who sell them. Term Life, Whole Life, Final Expense, and Preneed Funeral insurance — what does it all mean?
There’s such a variety of plans because each type of insurance helps covers end-of-life expenses in different ways. Your situation and wishes determine which plan will work best to secure your financial future — and your family’s financial future. You’ll want to consider your health, income, and what you want the policy to do. Do you only want to cover your funeral, or are you looking for more comprehensive protection?
To help you decide which plan is best for you, let’s walk through life insurance definitions and compare Term vs. Whole Life insurance and Preneed insurance vs. Final Expense insurance.
What is Term Life insurance?
Term Life insurance is often called pure life insurance and is meant to protect your family from loss of income after your death. This type of insurance is considered temporary because it is purchased for a specific time period, known as a term. It guarantees payment of a specified death benefit during the selected term. If you don’t pass away during the specified term, you can either renew another term, convert to permanent coverage, or terminate the policy.
Term Life insurance is the most affordable life insurance to buy, but it usually requires a health assessment, costs more if you’re a smoker, and becomes more expensive to purchase as you age. It only provides death benefits, no additional cash value, so some people use it in addition to a permanent life insurance policy. It may also be converted to Whole Life insurance.
What is Whole Life insurance?
Whole life insurance is the most well-known and simplest form of permanent life insurance. Permanent means, as long as you pay your premiums, your policy will remain active for your whole life and your loved ones will receive your death benefit.
If you are older and have health issues, a Whole Life insurance plan may be easier to qualify for because most providers only require you to answer a few questions, instead of undergoing a health exam. This generally equates to higher premiums than a Term Life policy, but they don’t increase as you age.
Whole Life insurance includes an investment component known as the policy’s cash value. The cash value is based on how much the return on investment is worth. A portion of the cash value can be withdrawn or borrowed during the life of the policy. But if you don’t repay the loans, you’ll reduce your death benefit.
What is Final Expense insurance?
Final Expense insurance is a type of Whole Life Insurance and alleviates the burden on your family by covering funeral costs — and an array of other expenses. Your family can decide how to dispense the money, which can be used for unpaid bills, medical expenses, and even college tuition for children or grandchildren. If they choose to use it for your funeral, they can make arrangements with any funeral home.
What is Preneed Funeral insurance?
Preneed Funeral insurance, also known as burial insurance, is a type of permanent life insurance that only covers your funeral expenses. It’s purchased through a funeral home, which becomes your insurance beneficiary. You attend a preplanning appointment with your funeral home director, where you choose every element you want included in your funeral service. The funeral home director totals the costs, and that amount is the basis for your Preneed Funeral insurance plan. It also holds that rate for the cost of your funeral, regardless of inflation. Upon your death, the funds are given to the funeral home to pay for your funeral, and your family is not required to pay anything extra.
Differences among types of insurance
Now that you have a basic understanding of each type of insurance, let’s compare and contrast them, so you can decide which type is right for you.
Term Life vs. Whole Life insurance
Term Life pays the death benefit if you die during a specified time period. Whole Life provides coverage for your entire life as long as premiums are paid.
Term Life only pays a death benefit. Whole Life pays a death benefit and a cash value accumulation that builds during the life of the policy. Both are paid to your primary beneficiary.
Term Life insurance costs less than Whole Life insurance, but it has an end date. Whole Life initially has more expensive premiums than Term Life insurance, but it can potentially save you money over the life of the policy if it is in force for a considerable number of years.
Term Life requires a health assessment, costs more if you’re a smoker, and becomes more expensive to purchase as you age. Whole Life insurance is generally easier to qualify for than Term Life insurance because a medical exam is usually not required.
Preneed Funeral insurance vs. Final Expense insurance
Preneed only covers your funeral expenses. Final expense pays funeral costs and bills left behind after your death.
Preneed holds funeral costs at present day prices. Final Expense does not but it allows your family to work with any funeral home.
Preneed thoroughly outlines your final wishes. Final Expense leaves decisions to your family.
The Preneed beneficiary is your funeral home. The Final Expense beneficiary is your primary beneficiary.
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