Types of Life Insurance

Although at first it may seem overwhelming, shopping for life insurance can almost be like shopping for a car – there are many options to choose from. But, once you have a good understanding of how each feature works, it becomes much easier to pare down which type of policy will work best for you and your specific coverage needs.

Life Insurance Categories

There are two primary categories of life insurance. These are term and permanent. Within each category, there are a number of additional variations. Term life insurance provides only a death benefit to a named beneficiary upon the passing of the insured. Because term insurance is considered to be “plain vanilla” basic coverage, it can usually be purchased fairly inexpensively – especially if you are young and in good health.

Permanent life insurance policies offer death benefit coverage, along with an additional savings or investment feature. The premium for permanent life insurance is typically higher than for a comparable amount of term life coverage – at least at first – however, that is primarily due to the fact that a portion of each premium payment is going into your savings or investment component.

Term Life Insurance

Term life insurance is the most basic form of all life insurance policies. This type of life insurance has a specific coverage period – or “term” – such as 10 years or 15 years. If the insured should pass away during this time, the insurance company will pay out the stated amount of death benefit on the policy.

Once the period of time has elapsed, the insured will need to renew the policy if he or she wants to continue their coverage. At that time, the premium will likely go up, as it will be based upon the insured’s then-current age and health status. Term life insurance can provide a good way to obtain a large amount of coverage for those who are on a budget.

Permanent Life Insurance

A permanent life insurance policy is one that can be purchased for a person’s entire life. These policies offer a guaranteed amount of death benefit that will be paid to a named beneficiary upon the death of the insured person. Typically, the amount of the premium will remain the same throughout the life of the policy.

Permanent life insurance policies have two components. These are a death benefit component and a cash value, or savings, component. The cash value portion of the policy will accumulate cash that can be used by the policy holder to withdraw or borrow against. Therefore, permanent life insurance policies can provide you with death benefit protection, while at the same time providing a tax advantaged method for building up savings.

There are many variations of permanent life insurance. These include:

  • Whole Life Insurance – Whole life insurance is the most basic type of permanent life insurance. These policies pay a stated amount of benefit upon the death of the insured, and they also offer a guaranteed minimum amount of tax-deferred growth of the funds inside of the cash value component of the policy.
  • Universal Life Insurance – Universal life insurance policies also offer a death benefit and a cash value component, however, they provide more flexibility in that the policy holder can change – within limits – their death benefit amount, as well as the timing and the amount of their premium payments. In addition, whenever current market interest rates are higher than the insurance company’s stated guaranteed rate for the cash value funds, the insurer will generally pay the higher amount.
  • Variable Life Insurance – Variable life insurance policies offer both a death benefit and an investment component. Within the investment portion, the policy holder is able to take part in a variety of different options such as stocks, bonds, and mutual funds. Therefore, depending on market performance of the underlying investments, the funds may move up or down considerably. Therefore, while these policies allow for the possibility of growth, they also present the possibility of risk.

Getting the Right Coverage Before You Need It

While it may seem that there are many different life insurance policy options to choose from, we can help you to narrow down which one can be custom fit to your particular needs.

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