The following post is brought to you by Genworth Financial.
Life insurance can be difficult to understand because there are so many different types of insurance. If you’ve ever looked at the different choices, you know it’s easy to become overwhelmed by all the options. Furthermore, since most life insurance products are sold by salesmen, it can make the decision even more difficult. Here is a breakdown on what you need to know about the various types of life insurance policies.
Term Life Insurance
Term life insurance is one of the most common types of life insurance policies issued. This is the type of insurance that only lasts for the specified period of time – usually from 10 to 30 years. This type of policy has no cash value, and if the insured dies during the term, the policy pays the face value. Term life insurance is also usually the cheapest option for insurance, since it is “no frills”. There are two main types of term policies – level term and decreasing term. A level term pays the same amount of money as a death benefit at any point during the term, where a decreasing term pays less over time.
Permanent Life Insurance
Permanent life insurance is also called cash value life insurance, and is really just a general name for a variety of policies that combine life insurance with a savings arrangement. Also, as the name implies, these policies are designed to be help for the duration of one’s life. The basis for permanent life is that the policy is renewable and the premiums are fixed based on the information of the insured when the policy is initiated. Early in the policy, there is more insurance, and the death benefit will come from this. Later in the policy, since the cash value will be higher, less insurance is needed to pay the same benefit. These policies tend to have a lot of fees involved in setting up and maintaining, so make sure that you investigate your plan thoroughly.
Whole Life Insurance
Whole life insurance is the most basic form of permanent life insurance. In this plan, regular premium payments are made that cover both the insurance and the savings account. This premium is also fixed over the life of the entire policy. A fixed death benefit is paid to the beneficiary over the life of the policy.
Universal Life Insurance
Universal life insurance is similar to whole life insurance, except that instead of a traditional savings account, the insured can select variations of savings or insurance instead. The insured can also shift money between the insurance and savings components of the policy, however, in some cases; this may change the death benefit payout amount. The benefit of this policy is that the holder can adjust the policy based on external conditions. If the savings rate is poor, they can pay insurance premiums instead. As the rate of return on savings or investment grows, they can shift more money there.
There are also many other options when it comes to insurance. For example, instead of whole or universal life, there is variable life. Variable life insurance offers an investment component instead of a savings account. Holders of these policies can select mutual funds or other investments to invest in, rather than just a savings account accruing interest. These policies could allow for better performance, due to the increases in the stock market, and they typically insure a minimum death benefit.
There is also single premium life insurance, which is one of the simplest forms of whole life insurance. Instead of paying monthly premiums, you could elect to just pay one premium in a lump sum. The contract is still calculated using the same factors, it is just the premium structure that is different in this variation.
Finally, you could get variable universal life. This is a combination of variable life insurance and universal life insurance, which allows the holder to choose investments in the savings vehicle, but also allows for moving funds between the savings and insurance portions of the policy. Some investment advisors will even suggest this to clients because of the tax advantaged nature of the policy, but it is important to keep in mind the fees related to the insurance policy.
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