Types of Life Insurance Policies: An Introduction to Life Insurance
Types of Life Insurance Policies1

As most people know, there are many different kinds of insurance. Most of us need different types of insurance to protect us from unforeseen accidents. That is why most of us pay for auto, home, and health insurance without a second thought. Life insurance is another important type of insurance, unfortunately many people do not think as much about life insurance as they do other types of insurance. This is mainly because life insurance is not required by law as other types of insurance are. Life insurance is an important type of insurance to have; we will discuss the different types of life insurance policies that are available.

Types of Life Insurance Policies

Like all other types of insurance, life insurance comes in all shapes and sizes, and not all policies are created equally. For instance, while the benefits that are paid upon death may be similar, the cost, structure, duration, and other factors can vary greatly from one type of policy to another. To look at things simply, all life insurance policies fall into two categories: one is term life insurance and the other is permanent life insurance.

Whole Life

This is one of the types of life insurance policies that fall into the permanent category because it provides coverage for the life of the insured as long as the premiums are paid. One reason that many people choose whole life policies is because they carry a cash value. This cash value grows at a rate that is guaranteed by the policy and is tax deferred. There are two things to know about cash value: first, the interest you earn will be at a low rate, and you can borrow against the cash value of the policy in an emergency. Another advantage of this type of life insurance is that the premiums remain the same for the life of the policy, and the death benefits are guaranteed for the lifetime of the insured.

Universal Life Insurance Polices

These life insurance policies are also known as flexible premium or adjustable life policies. Universal life policies are a modified type of whole life policies, therefore these policies also fall into the permanent category. Universal life policies also offer a cash value benefit that is based on the interest rates at the time you purchase the policy. The major difference between universal and whole life insurance policies are that the premiums, cash values, and amounts of protection can all be moved up or down depending on your needs and your budget. This feature makes universal life insurance policies very popular. The one drawback is that the insurance provided can also change the amount of interest they pay on your cash value, but the amount of interest you earn usually has a minimum level it cannot drop below.

Variable Life

Variable life is another of the types of life insurance policies that some people like to purchase because the growth potential of the policy is tied to investment funds. This means that the cash value of this type of insurance can grow at a rapid rate, on the other hand it can also drop just as fast depending on the markets. This is a good type of life insurance for those that do not mind taking a little risk to earn big rewards. Although this type of insurance is a little riskier than other types, you still have guaranteed death benefits, and guaranteed premiums.

Variable Universal Life

As the name implies this is at type of life insurance that combines the features of both universal and variable life insurance policies. If you purchase this type of policy, you will have the benefit of being able to change your premiums, benefits, death benefits, and you will be able to choose how your cash value is invested. You will also have the possibility of your cash value growing at a rapid rate. One thing to be aware of is that variable universal life policies are considered a security making them subject to the regulations of the Securities and Exchange Commission, SEC. Another problem with this type of policy is that your death benefit is not guaranteed, it is based on how well the investment part of the policy performs. Most companies that deal in this type of life insurance do guarantee a minimum death benefit.

Term Life

Of all of the different types of life insurance policies term life policies are one of the most popular. The main reason that term life policies are so popular is the fact that they are the least expensive of all types of life insurance policies. The reason term life policies are so inexpensive is because they do not build cash value, they only pay the face value of the policy, and, as the name implies, the policy is only good for a set amount of time. Term life policies are a great way to protect your family from financial loss resulting from your death. You can purchase term life policies for different numbers of years, but the maximum number of years is thirty. For this reason, term life policies are not the best policies for young people. Another thing to consider about term life policies is that your premiums will increase as you age.

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