The life insurance is an essential part of financial planning. The main reason for buying life insurance is to make sure there is some compensatory income for the legal beneficiaries left behind following the death of an individual. Some limited term life insurance policies are also an investment tool, which have a cash value when they mature but also pay out a lump sum should the holder die before the maturity date.
Before buying life insurance you need to consider which policy is going to meet your needs at a price you can afford. Once you have decided on the type of policy, the most popular options are described in detail below, you need to then find the insurance company that is offering what you need at the lowest cost. When considering cost you must also factor in variables such as the potential payout value of the policy, policy terms, conditions and exclusions, and early surrender penalties.
Six Basic Kinds of Life Insurance
There are six basic types of Life Insurance and it is essential that you choose the one that is most appropriate to your circumstances and needs.
- Term Life Insurance
- Endowment Life Insurance
- Whole Life Insurance
- Variable Life Insurance
- Universal Life Insurance
- Variable Universal Life Insurance
Term life insurance provides life cover protection for a term of one or more years. Some companies offer policies with terms of up to thirty years. The premiums payable on term insurance policies remain the same throughout the life of the policy. Term Life Insurance policies have no cash value at the end of the cover period. They pay out only if the holder dies within the time period covered by the policy. These insurance policies generally provide proportionally larger payouts than other policies on the death of the policyholder.
Some term life insurance policies are renewable for one or more additional terms even if your health has deteriorated. However, each time you renew the policy, premiums will be higher. Learn More.
An endowment insurance policy has an assured cash value on maturity at the end of the term of the policy. It can also have value added as the insurance companies invest endowment policy funds and profits made can be shared with policyholders. With endowments the premiums paid are higher than with whole life, and on the policy reaching its payout date there is a guaranteed sum assured to the holder. However, in the event of the policyholder’s death before the policy matures, the amount payable to beneficiaries can be proportionally lower than with some other life policies. Learn More.
Whole life insurance gives protection for the lifetime of the policyholder. The most common type is called straight life or ordinary life insurance. With this you pay the same premiums for as long as you live. These premiums can be substantially higher than you would pay when starting a term insurance policy of the same payout value. However, you would eventually pay much more if you were to continually renew a term insurance policy into your later years.
Some whole life policies allow you to pay premiums for a less than whole life period such as 20 years, or until age 65. Premiums for these policies are higher because the premium payments are set for a fixed period. Learn More.
Variable life insurance provides protection to the beneficiary on the death of the policyholder. This type of policy is ‘variable’ because a proportion of the holder’s premium dollars are allocated to a separate investment account. This means the cash value and death benefit payable can fluctuate up or down. Most variable life insurance policies guarantee that the death benefit will not fall below a specified minimum. However, a minimum cash value on the investment portion is not usually guaranteed. Variable insurance is a form of whole life insurance and because of associated investment risks it is also considered a securities contract. It is regulated as securities under the Federal Securities Laws and must be sold with a prospectus. Learn More.
Universal Life insurance is a variation of Whole Life Insurance. With this type of policy a portion of the flexible premium payments is invested by the insurance company into a combination of mortgages, bonds and money market funds. There is usually a guaranteed minimum interest rate applied to the policy, so a return is guaranteed to the policyholder. However; if only the minimum designated premium instalments are paid, while the policy will stay in force for its lifetime, they would not normally be sufficient to build up a substantial cash value. Learn More.
Variable universal life combines the features of Variable and Universal life insurance. It gives flexible premiums and adjustable death benefit. The amount of the death benefit is dependant on the success of your investments. If the investments perform poorly or even fail, there is a guaranteed minimum death benefit paid to your beneficiary upon your death. Variable universal gives you more control of the cash value account portion of your policy than any other insurance type and substantial cash value can be built up. This is not by any means assured and the policy owner assumes the investment risk. Variable Universal products are regulated as securities under the Federal Securities Laws and must be sold with a prospectus. Learn More.