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What are the Types of Life Insurance Policies?
The two primary types of life insurance are term life insurance and cash value insurance. Term life usually offers the lowest cost of insurance but it doesn’t build savings or cash-in value, nor is it permanent lifetime coverage. There are some people who choose to carry both types of life insurance. Many term life insurance policies can be converted before an age stated in the policy to permanent universal life insurance. That conversion is based on your health risk category when your policy was originally issued.
Term life insurance covers the insured for a period or term of one or more years. Ten, twenty, and thirty year increments are the most common. Level term insurance provides a fixed cost over the period of coverage. The policy pays out the death benefit only if the insured person dies during the covered term. Term life insurance usually offers the largest insurance protection for the premium dollar. It does not build up cash value, though, unless you purchase a return of premium (ROP) policy.
Term life insurance can be cancelled at any time without any further obligation. In this way, it is similar to auto insurance. If the policy is cancelled, the coverage ends and your payment obligation ends.
Cash value life insurance has higher premiums at the beginning than they would be for the same amount of term life insurance. The portion of the premium that is not used for the cost of insurance is invested by the company to support the cash value portion of the policy. One can use this cash value, as it builds, in a number of way. One can borrow against a policy’s cash value by taking a policy loan. One can also use the cash value to keep insurance protection for a limited time or to buy a reduced “paid up” policy without making additionalr payments. Cash value life insurance may be one of several types including whole life, universal life, and variable life.
Whole life insurance covers you for as long as your premiums are paid. Usually you pay the same amount in premiums for as long as you live. When you initially take out the whole life policy, the premiums may be several times higher than you would pay initially for the same amount of term insurance. They can be lower, though, than the premiums you would eventually pay if you were to keep renewing term a term policy during your later years.
Universal life insurance is a flexible type of policy that lets you vary your premium payments. You can also adjust the face amount of your coverage. For increases, you may be required to prove that that you physically qualify for the increased benefit. The premiums you pay, (less any expense charges, are directed to a policy account that earns interest. Charges are deducted from that account. If your yearly premium payment plus the interest your account earns is less than the total charges, your account value will decrease. If it continues to drop, eventually your coverage will end. To prevent that, you can start making premium payments, or increase your premium payments, or alternatively lower your death benefits.
Online Life Insurance Resources
- Learn about the Benefits of Life Insurance
- What is guaranteed approval life insurance?
- Should you consider a guaranteed coverage policy?
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