Life Insurance is a contract purchased from an insurance company that promises to pay a certain sum to a beneficiary upon the death of the person insured by the policy. There are a variety of life insurance policy types including Whole Life, Term Life, Universal Life, Level Term, Mortgage Life insurance and many more. All of these policy types may be boiled down to two basic categories: Term Life (temporary) Insurance and Permanent Life Insurance.
Term Life Insurance accumulates no cash value and generally offers the lowest premium of any form of life insurance. It is designed to be in force for a specific (limited) period of time and/or to terminate at a given age. When someone has a debt obligation and wants the debt to be satisfied in the event of their premature death, term life insurance may be the solution. Term Life Policies may be purchased as Level Term or Annual Renewable Term.
Level Term policies are designed to provide a level death benefit and a level premium for a specific number of years, usually, 10, 15, 20 or 30. During the level period both the premium and the death benefit remain the same (level). At the end of the level period, premiums usually increase dramatically so it is important to choose an adequate level term period when initially purchasing a policy. Annual Renewable Term Life Insurance does not have a level guarantee period and the premium increases each year.
While less expensive than level term for the first couple of years, most of the time if you need Life Insurance for more than 4 or 5 years, the level term policy is the better choice.
Permanent Life Insurance Policies can be designed to remain in force to age 100, age 120 or simply "for life" and depending upon the premium arrangement, may accumulate cash value. Permanent Life Insurance does not terminate after a pre-determined number of years and is designed to last for the insured's full expected lifetime. It includes three basic types: Whole Life, Universal Life and Variable Life Insurance Policies.
Whole Life Insurance is the most expensive and least flexible of all permanent policies. Most Whole Life Policies have level, lifetime premiums and may pay dividends and/or interest on cash value accumulations. Cash value may be borrowed from the policy or the policy can be surrendered and any cash value accumulations returned to the policy owner. Typically, the death benefit is reduced by any outstanding policy loan amount at the time of a claim. Due to the greater flexibility of other types of permanent insurance, Whole Life Insurance is becoming less common in the insurance marketplace.
Universal Life Insurance is similar to Whole Life but with a couple of twists. Within certain parameters you get to decide how much you want to pay for the Universal Life Insurance Policy. Within the premium guidelines, paying at or near the maximum will result in greater cash value accumulation and better policy guarantees while paying closer to the minimum will result in little or no cash value accumulation and shorter guarantee periods. Probably the most attractive feature of these contracts is that, subject to underwriting guidelines, Universal Life Insurance Policies allow you to increase or decrease the death benefit and premium as your life insurance needs change.
Variable Life Insurance is similar to Universal Life in terms of policy flexibility but also provides the opportunity to invest cash value accumulation into various mutual funds or stocks. Market fluctuations not only affect cash value but can also affect the death benfit and general viability of the policy. Before investing in any Variable Life Insurance Policy be certain that you understand your specific contract completely and that you are aware of all the potential down-side risks.
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