Types Of Life Insurance

Description of several types of life insurance products including Single Premium Life, Term Life, Whole Life, Universal Life, and Variable Life policies

There are many types of life insurance products available to meet the differing needs of many individuals and families. It is often difficult to understand what kind of protection each policy offers. Learn more about the various types of life insurance products and to clarify the differences between these policies. In order to evaluate which life insurance policy will meet your particular needs, it is important to discuss the matter with an agent or advisor. There are numerous factors to evaluate before purchasing life insurance coverage. Some of the many things you should consider include your age, marital status, number and ages of your children, medical history, earning capability, debt ratio, and anticipated financial needs.

Single Premium Life insurance requires the insured to pay a one-time premium to receive a fully paid life insurance policy. There is usually a minimum death benefit that depends on the individual insured and the amount of the lump sum payment received for the policy. Normally, the full payment goes into a cash value account and the interest rate is applied to the cash value account annually. The interest rate may fluctuate from year to year but there is usually a guaranteed minimum interest rate amount. The insurance company typically charges an annual fee, which covers mortality risks and administrative costs. This policy is usually looked at as a long-term policy since insurance companies typically charge a large amount on a Single Premium Life insurance policy if the insured takes money out during the first few years. The insured may take out a loan against this type of policy and usually the terms are favorable to the insured. Most insurance companies try to structure these policies to meet federal tax law requirements so that death benefits are free from income tax to the beneficiary.

Term Life insurance provides a specific amount of life insurance coverage for a designated time period. Currently, the available policy lengths for Term Life insurance are one year, five years, ten years and fifteen years. If the insured person dies within the time frame in which the policy is in effect, the insurance company pays out the face value of the policy. If the insured person lives longer than the term of the policy, the policy expires and would pay nothing. Term Life insurance does not build any type of equity is often one of the least expensive types of insurance and is available in several forms. Term Life insurance is typically purchased as a means of temporary protection or when an individual can't afford the cost of other forms of Life insurance. Some people prefer to invest their own money elsewhere and feel they can obtain higher yields without having to use a Life insurance plan.

There are Renewable and Non-Renewable Term Life policies. Both of these types are fairly simple and can be dealt with quickly. With Renewable Term Life, one automatically re-qualifies and is able to continue the existing policy when the original term is up. Non-Renewable simply means that when the policy expires the individual must take another physical and answer more health questions in order to re-qualify for a new policy.

There are also Convertible and Non-Convertible Term Life policies available. With Convertible Term Life policies, the insured may switch his/her term policy into a permanent form of life insurance such as Whole Life, Universal Life or Variable Life. Non-Convertible simply means that one can't switch the policy to another form of life insurance.

Level and Decreasing Term Life insurance are often more difficult to understand and determine which is appropriate for one's needs. The selection of one over the other is entirely dependent on the individual's personal financial conditions and needs. Level Term insurance provides a designated dollar amount of coverage for the entire period of the policy. For example, a five-year Level Term policy for $100,000 will pay $100,000 at any time the insured dies within the policy's effective period. With Decreasing Term, the sum of money that will be paid upon the death of the insured is reduced gradually over the policy period. Less would be paid out as the policy ages. One reason to select Decreasing Term insurance may be that one's financial needs may be decreasing during the policy period. For example, if you were to purchase a 10-year Decreasing Term policy and were anticipating having your house paid off or your children out of college, you may not feel that you need as much Life insurance in the future as you do today.

Whole Life insurance provides coverage for the entire life of the person insured, regardless of how long you have the policy or how much has been collected in premium payments that keep the policy in force. Premiums may be paid throughout the insured's life or for a portion of his/her life (for example, 10 years or 20 years). Also, premiums may be paid in lump sums when the policy is taken out. The cash value portion of a Whole Life insurance policy belongs to the insured and may be taken out as policy loans or when the policy is cashed in. With Whole Life insurance, part of the premium payment goes toward the insurance portion of the policy, part of the premium payment goes toward administrative expenses and the remainder goes toward the investment or cash portion of the policy. The investment portion of the policy usually consists of stocks, bonds and/or mutual funds. Interest drawn on the investment portion of a Whole Life policy is usually tax-free until it is withdrawn.

Universal Life insurance is a variation of Whole Life insurance. The difference is that with Universal Life, the term life portion of the policy is separate from the investment or cash portion of the policy. Also, with Universal Life policies, the investment portion of the policy is invested in money market funds as opposed to stocks, bonds and mutual funds. The cash value portion of the policy is an accumulation fund that investment interest is credited to and death benefits are paid from. With Universal Life insurance, the insured can vary the amount of his/her annual death benefit and annual premium payments. Insured people may also make partial surrenders of the policy and/or take policy loans against the cash value of the policy. A partial surrender is when an insured withdraws some of the funds that have accumulated in the investment or cash portion of the policy.

There are two types of Universal Life insurance. Under Option A, there is a set death benefit for the insured regardless of premiums paid to keep the policy in force. Under Option B, the death benefit for insured is equal to a set amount plus the current cash value of the policy at the time of the insured's death. Option B usually pays out more than Option A following the death of an insured.

Variable Life insurance is also a form of Whole Life insurance. As with Whole Life and Universal Life insurance, part of the premium payment goes toward the term life portion of the policy, part to administrative expenses and part to the investment or cash value portion of the policy. There is a major difference between the investment portion of Variable Life and that of other forms of life insurance. With Variable Life, the insured person (you) is able to choose how to invest the funds in the investment portion of the policy. The insured may select from an array of investments such as stocks, bonds and mutual funds as long as they are within the insurance companies portfolio. Usually, there are a few times during the year that the insured person may modify his/her investment selections. Variable Life insurance is generally more expensive than other forms of Life insurance. Death benefits may fluctuate up or down depending on investment performance however, there is usually a minimum level for benefits so they will not drop below a certain level.

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