Types of Life Insurance Author:    Posted under: Life InsuranceLife Insurance Types


Life Insurance is a security we pay for in the event of death due to critical or terminal illness.  The insured pays a premium to the company, in payments that have been agreed upon by both parties.  Life insurance falls into two major categories, which are protection policies and investment policies.  Under protection policies are term life insurance, while under the investment policies are whole life, universal life, and variable life policies.  As the name denotes, protection policies entail providing a benefit to the beneficiary in the case of death, while an investment policies‘objective would be to facilitate the growth of capital by the premiums being paid by the insurer.

For easier reference, the terms have been broken down for you below.

Term Life Insurance. Term life is a type of insurance where the beneficiaries get paid the insured amount only when the insurer dies within the specified time covered by the policy.  Considered the most inexpensive type of insurance, it holds no cash value and is designed to cover 5, 10, 15, or 20 years per the policy.

Types of Term Life Insurance. Term life can be renewable and non-renewable.  The definition is fairly simple.  Renewable term life denotes that one can renew the policy automatically, once it expires, while non-renewable term life requires that the insurer be subjected to another battery of tests to re-qualify for a new policy.

It can also be convertible or non-convertible.  One may be offered the option of converting the coverage to a full life insurance policy.

Level and Decreasing types of term life insurance are more complex to explain.  In level term life, a designated amount is what you are going to pay for a specified term period.  For decreasing term life, the payout that you expect at the end of the period covered decreases.  You may opt for this if you expect that your finances will possibly even out in the future, such as your child graduating from college, or finishing the mortgage of your house, etc.

Permanent Insurance. This is a type of insurance, which remains en force throughout the person’s lifetime until the policy matures.

Types of Permanent Life Insurance. Whole Life Insurance protects the insured for his entire lifetime regardless of how many years he has agreed to paying the premium.  It builds up a cash value over time that can be withdrawn or borrowed by the insurer.  The insurance company uses the premiums you pay to invest in fixed income securities, and other money-market instruments.  Not only do your beneficiaries receive a death benefit, you also get to have cash out options during the period wherein the policy is active.  The main selling point of this type of insurance is the fixed guarantee that you will receive a death benefit and payout once your policy matures.  Likewise, your annual premium does not change over time.  The amount you pay per year remains the same.

Universal Life Insurance is a variation of whole life insurance.  Unlike the guaranteed values of the whole life insurance, universal life offers flexibility and affordability.  You control how your insurance will work for you.  The whole premium that you pay for universal life goes into your cash value, and the insurance company withdraws from this amount, the administrative fees that they need.  The high flexibility that this type of insurance offers is its greatest asset.   However, one would need to have the time and energy to focus on maintaining and keeping close track of what is needed to be done in order to fully maximize the benefit of this insurance policy.  There are two types of universal life, which are level and increasing.  For level death benefit, the beneficiary gets the death benefit’s face value alone, while increasing death benefit gives the beneficiary the death benefit plus the cash value of the insurance premium.

Variable life is also one kind of permanent life insurance.  There is what you call variable whole life insurance and variable universal life insurance.  For variable whole life, it leaves the policyholder to decide where to invest the money he is paying the company.  However, this policy has fixed premiums and a fixed death benefit.  For variable universal life, the policyholder also invests the money as he pleases.  It is the hardest to manage as you yourself will have to maintain a dedicated amount for your cash value, and determine where to put your money where it will gain high returns.  It is recommended for those who need to invest their money when there is a need to (funding mortgages, college education fees, etc.), and then eventually, give up the policy to receive the cash value that one can use for retirement purposes.

Sources:
http://www.pacificlife.com/Channel/Educational+Information/Life+Insurance+Concepts/Various+Types+of+Life+Insurance.htm
http://en.wikipedia.org/wiki/Life_insurance#Term_Insurance
http://www.essortment.com/all/lifeinsurancep_rmee.htm
http://www.wholesaleinsurance.net/life-insurance/universal/variable.asp

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