Unlike rider policies, there are different types of life insurance policies that can be purchased separately. Each of them having their own specific purpose.
A whole life insurance policy that insures all the members of an immediate family – husband, wife, and children – in the event that something happens. Usually, the coverage is sold in units per person, with the primary wage earner insured for the greatest amount.
Family Income Life Insurance
This is a decreasing term policy that provides a stated income for a fixed period of time, if the insured person dies during the term of coverage. These payments continue until the end of a time period, specified when the policy was purchased.
A life insurance policy on a child, with coverage paid for by an adult, usually the grandparents or guardians. Such policies are not considered traditional life insurance because the child is not producing an income that needs protection.
However, by buying the policy when the child is young, the parents are able to lock in an extremely low premium rate and allow many more years of tax-deferred cash value buildup.
Credit Life Insurance
This type of insurance is designed to pay off the balance of a loan, if you die before you have repaid it. It is available for many types of loans, including student loans, auto loans, farm equipment loans, furniture, and other personal loans – including credit cards.
Usually, it is sold by financial institutions making loans, like banks, to borrowers at the time they take out the loan. If a borrow dies, the proceeds of the policy replays the loan directly to the lender or creditor.
On the average, this type of insurance is not considered a good buy as evidence in the following press release dated April 3, 2003, from the California Department of Insurance
“Sacramento, CA—Responding to a lawsuit filed against the California Department of Insurance (CDI) by the Consumer Credit Insurance Association in California Superior Court, Commissioner John Garamendi issued the following statement: “Credit insurance has been a monumental rip-off of consumers. In 1999, the Legislature recognized this fact and moved to protect consumer by regulating the premium rates charged by companies selling credit insurance. CDI studied these rates under the Low administration and confirmed the Legislature’s findings. I am not surprised these rip-off artists have filed suit in an attempt to continue to scam California consumers.’ ”
For more information, call the Consumer Credit Insurance Association at (312) 939-2242.
Senior Life Insurance
Also known as graded death benefit plan, they provide for a graded amount to be paid to the beneficiary.
For example, in each of the first three to five years after the insured dies, the death benefit slowly increases. After that period, the entire death benefit is paid to the beneficiary.
This might be appropriate if the beneficiary is not able to handle a large amount of money soon after the death, but would be in a better position to handle it a few years later.
This decreasing term coverage is designed to pay off the unpaid balance of a mortgage, if you die before the mortgage is paid off. Premiums are generally level throughout the term of the policy.
The policy is usually independent of the mortgage, meaning that the financial institution granting the mortgage is separate from the insurance company issuing the policy. The proceeds of the policy are paid to the beneficiaries of the policy, not the mortgage company, who is not required to use the proceeds to pay off the mortgage.
However, according to consumer organization, some of these can be the worst types of products in the financial world; so it you are considering one of these products, be sure to compare it with a traditional life insurance product.
Tony Steuer is an author and advocate for financial preparedness. Tony Steuer, CLU, LA, CPFFE, helps people make sense of the financial world in a way that’s easy for them to understand. His books including, “GET READY!,” “Insurance Made Easy,” and “Questions and Answers on Life Insurance,” have won numerous awards. Tony is the founder of the GET READY! Initiative which includes the GET READY! financial organization system, the GET READY! Financial Preparedness Club, GET READY! Podcast, and the GET READY! Financial Principles, a best practices playbook for the financial services industry. Tony served as long-term member of the California Department of Insurance Curriculum Board. Tony is regularly featured in the media including the New York Times, the Washington Post, Fast Company, and other media. He has also appeared as a guest on television shows, such as ABC’s “Seven on Your Side.” Visit https://tonysteuer.com/ to join the GET READY! Financial Preparedness Club and access free resources.