When investing in life insurance, there are a number of things to consider. For example: for how long will you need to be insured? Who will the insurance cover? How much is it worth? What benefits do you expect from it?
And when it comes down to buying your insurance, the answers to these questions will show you which type of cover you really need.
We know that life insurance can be very confusing. That’s why we are here to help so that you get the information you need to make the right decision about life insurance for you, your family and your dependents.
There are two major types of life insurance policy: a term life policy and a whole life policy. Whole life is also known as permanent life insurance, and it encompasses several subcategories, including traditional whole life, universal life and variable universal life.
In 2003, about 6.4 million individual life insurance policies purchased were term and about 7.1 million were whole life
A term insurance policy is the simplest form of life insurance. It pays only if death occurs during the term of the policy, generally between one and 30 years. The majority of term policies offer no life benefits, but premiums are significantly lower than those typically paid for a whole life policy.
Term life insurance is generally purchased by individuals who know when in the future they are going to be financially independent or who know that there will be a point when they will have no dependents. For example, when the mortgage is paid off and when the kids have all finished college and left home. Term life insurance enables you to pay a low premium for a set amount of time to make sure your dependents are covered, but prevents you from paying more for a whole life policy that you may not need in 30 years time.
There are two basic types of term life insurance policies: level term and decreasing term. Level term is when the death benefit remains the same throughout the duration of the policy, while decreasing is when the death benefit drops, typically in one year increments, over the course of the policies term.
In 2003, 97% of all term life insurance purchased was level term life insurance.
Whole life or permanent insurance pays a death benefit whether you die in the first week of your policy or after 100 years.
There are three major types of whole life insurance: traditional whole life, universal life and variable universal life. There are also variations within each type.
With a traditional whole life policy, both the death benefit and the premium remain constant (level) throughout the duration of the policy. The cost per $1000 of the benefit increases as the insured person ages, thus becoming very high when the insured lives beyond when is expected. While insurance companies could charge a premium that increases each year, making it very hard for most people to afford life insurance during old age, they instead charge a level premium throughout the life of the policy. So, the premium charged during the early years of the policy is higher than what is needed to pay claims. This money is invested, and used to supplement the level premium and help pay the cost of life insurance for people of advanced ages.
However, by law, when overpayments reach a certain amount, they must be made available to the policyholder at cash value if the insured decides not to continue with the original plan. It must be taken into account that this cash value option is an alternative, not an additional benefit under the policy.
Universal life insurance and variable life insurance policies where introduced during the 1970s and 1980s as variations on the traditional whole life insurance policy product. With a universal life insurance, consumers have flexibility in the premium payments, death benefits and the savings element of their policy. While a variable life insurance policy is a where the cash value is invested in several sub-accounts, similar to mutual funds.