Life Insurance: Different types
of life insurance
All policies are not the same. Some give coverage for your lifetime and others
cover you for a specific number of years. Some build up cash values and others
do not. Some policies combine different kinds of insurance, and others let you
change from one kind of insurance to another. Some policies may offer other
benefits while you are still living. Your choice should be based on your needs
and what you can afford.
There are two basic types of life insurance policies you can purchase: term
insurance or cash value insurance, also known as permanent insurance. Term
insurance generally has lower premiums in the early years, but does not build up
cash values that you can use in the future.
A Term Life Insurance covers the insured for a certain
period of time known as the "term." Terms can be anywhere from one to 30 years
and offers the greatest amount of financial protection at the lowest cost. This
kind of policy pays death benefits only if the insured dies during the life of
the policy (the term).
Cash Value Life Insurance or permanent life insurance is a type of
insurance where premiums charged are higher at the beginning than they would be
for the same amount of term insurance. The part of the premium that is not used
for the cost of insurance is invested by the company and builds up a cash value
that may be used in a variety of ways. You may borrow against a policy’s cash
value by taking a policy loan. If you do not pay back the loan and the interest
on it; the amount you owe will be subtracted from the benefits when you die, or
from the cash value if you stop paying premiums and take out the remaining cash
value. You also can use your cash value to keep insurance protection for a
limited time or to buy a reduced amount without having to pay more premiums. You
also can use the cash value to increase your income in retirement or to help pay
for needs such as a child’s tuition without canceling the policy. However, to
build up the cash value, you must pay higher premiums in the earlier years of
the policy. Cash value life insurance may be one of several types: whole
life, universal life and variable life.
- Whole Life Insurance covers you for as long
as you live if the premiums are paid. You generally pay the same amount in
premiums for as long as you live. When you first take out the policy, premiums
can be several times higher than you would pay initially for the same amount
of term insurance. But they are smaller than the premiums you would eventually
pay if you were to keep renewing a term policy until your later years. Some
whole life policies let you pay premiums for a shorter period such as 20
years, or until age 65. Premiums for these policies are higher since the
premium payments are made during the shorter period.
- Universal Life Insurance is a kind of
flexible policy that lets you vary your premium payments. You can also adjust
the face amount of your coverage. Increases may require proof that you qualify
for the new death benefit. The premiums you pay (less expense charges) go into
a policy account that earns interest. Charges are deducted from the account.
If your yearly premium payment plus the interest your account earns is less
than the charges, your account value will become lower. If it keeps dropping,
eventually your coverage will end. To prevent that, you may need to start
making premium payments, or increase your premium payments, or lower your
death benefits. Even if there is enough in your account to pay the premiums,
continuing to pay premiums yourself means that you build up more cash value.
- Variable Life Insurance is a kind of
insurance where the death benefits and cash values depend on the investment
performance of one or more separate accounts, which may be invested in mutual
funds or other investments allowed under the policy. Be sure to get the
prospectus from the company when buying this kind of policy and STUDY IT
CAREFULLY. You will have higher death benefits and cash value if the
underlying investments do well. Your benefits and cash value will be lower or
may disappear if the investments you chose didn’t do as well as you expected.
You may pay an extra premium for a guaranteed death benefit.
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How
much should it cost?
I'd
like to live as a poor man with lots of money.
--Pablo Picasso --
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