Different Types Of Life Insurance Policies

by Theresa Hus Content Writer for RealEstateAgent.com

The meaning of life insurance is relatively simple but what life insurance covers is quite the opposite as there are many options. Life insurance does just what the name implies. It ensures your life. For instance, during your life, you get life insurance and when you die, what you pay for the life insurance goes to your chosen beneficiary. To put in simple terms that is.

So what is life insurance?

A life insurance policy is a contract between two parts with a third beneficiary. The two parts are the one getting life insurance (the insured) and the insurance company. Now, during the decided period of time, the insured commits to pay a certain amount of money to the insurance company which in return agrees to repay the beneficiary of the policy when the insured dies.

Life insurance covers many things that might not be covered if one of the sources of income is lost. For example, we have a married couple that has two sources of income, a child and a mortgage. If one income earner dies, the one left will have to manage all future expenses from their own income. Life insurance can cover mortgage payments, school tuitions, funeral arrangements and make up for the income that was lost. Purchasing life insurance can be seen as a responsible thing to do in these circumstances, so by getting one you make sure that, if something happens, your families expenses would be covered. When purchasing life insurance make sure you have an idea of the expenses it would need to cover in case of death in order to know how much to spend on life insurance.

The topic itself isn’t particularly easy even to discuss as a subject, not to mention the difficulty of convincing a person to give you money for an unforeseeable demise. Life insurance is said to be the most difficult thing to sell.

Types of life insurance

Life insurance can be either permanent insurance or term insurance. The biggest difference between the two is the period of time. While permanent life insurance covers you for life, term life insurance coverage is for a set period of time. One thing you should also figure out is what type of insurance is right for you and your needs.

Permanent life insurance

The broader category for life insurance is permanent life insurance. With premium payments made throughout your life, your chosen beneficiary will receive the end benefit in the event of your death. Permanent life insurance can also have an added value from investments which will be received as well by the beneficiary. Permanent life insurance can be also cashed out - with some penalties - in case the situation changed, your mortgage is paid, the kids are all grown up and independent. That money is set aside and it can be used if you so choose just so that you can enjoy the best affordable healthcare in one of the best locations in your retirement. The two main options for permanent life insurance are whole and universal.

Whole life insurance

This type of life insurance has fixed premium payments from the start of the policy until the end. The payments are higher and they seem unnecessary for younger people, especially when they have other options available. Whole life insurance, however, is separated into two parts and split how the insured wants.

First, we have the death benefit which is to be paid to the beneficiary in the event of the insured’s death. This is not affected by the second part and is fixed from the set payments.

The second part is the cash value that can be gained during the policy’s life. The cash value is the result of the part of payments that goes into investments. With this part, the insurance company, through specialized market investors, invests your money in the market. This part can be used as saving or to be borrowed if in need of money while alive.

The second factor is the reason for which whole life insurance is 5-10 times more expensive than term life insurance. It isn’t the best option for investment purposes as you can choose to work with an investment broker and gain more of an increase. It is, however, a good variant for young people who want to make a long term investment and do not have the means to save money on their own. With whole life insurance, you pay annual/semi-annual/quarterly premiums that take the money out of your pocket and tucks it away safely for unforeseeable events.

There are penalties for choosing to end the policy early, take out a loan from the policy or surrendering/cashing out the policy for its current value.

Universal life insurance

The most flexible of life insurances, universal life insurance provides coverage for the same amount of time as whole life insurance as well as cash value. The difference between the two is that with universal life insurance you have flexibility. Once your cash value has collected money, you can change your premium payment value and the frequency of the payments. You can also make the profit cash value to pay your premiums completely when there is a profit. Payments can also be decreased if the financial situation changes and you are incapable of paying the initially set sum from your pocket or from the cash value. Doing this, however, can decrease the death benefit.

You can also increase the payments and, by doing that, increase the death benefit. It works both ways. It is perfect for those who want to use it as protection against loss of the main source of income as well as mortgage payments, children and other expenses. It can be structured to the current needs and then changed if the needs change.

It works the same as whole life insurance with the investment portion and insurance portion. It also has higher premiums but can also replace income, real estate payments and can even be turned into a steady income in the event of death if the insured was the main source of income in the family.

Term life insurance

This type of insurance is for a specific period of time. It does not offer lifetime coverage as the most common periods of coverage for term life insurance are 5,10, 20 or 30 years. Other options are also available but the expenses grow with the time period it insures. This happens because if the life insurance is longer, the risk of death increases.

Term life insurance does not provide profit from the cash value, it only offers death benefits.

After the contracted period of time, some policies and companies can offer to extend the insurance. This can only happen after a reevaluation of the insurer’s health as well as an increase in premium payments.

Term life insurance covers mortgage, college payments, etc. because it can be used as a safety net if the main income earner dies so that the family can still meet the financial needs.

When the term life insurance has run its course, another term life insurance can not be purchased at the same payment plan. The new policy will be calculated with the current age as well as current medical history. Some companies allow a transformation from term life insurance to whole life and this should be revised with an insurance adviser if needed.

Whole life insurance as an investment

The first thing that potential life insurance clients have to know is that a whole life insurance policy is not something to be used for investing purposes. It has that added benefit, yes, but it’s not an investment.

Those who are interested in investments should go on the stock market, meet with an investment broker, call an adviser to help, but they should not use their life insurance as an investment. Why? Because you can’t. There is a team that takes care of the investment part of your insurance and while you can choose the level of risk you want to be exposed to while investing in the market, this kind of investment is not one that you as a stakeholder can control. Because you are not the one who manages it and you can not tell them how to manage it.

Can whole or universal life insurance bring a profit? Yes. But that profit more often than not remains in the policy itself to be used for payments or add to the death benefits. You can take a loan from it but at an extra cost so it’s not really beneficial. The investment part of life insurance, whole or universal, is only profitable for long term uses. Usually, the level of risk clients want to be exposed to is rather low, which is why the investments made from life insurance are very cautious which is why the profit is relatively small for short term benefits.

Investments made for profit should be done through the stock market and investment brokers.

Conclusion

When in search of life insurance it is very important that you know the reason for which you want life insurance because based on that reason you might find the kind of life insurance that fits your needs better. Whole life insurance might be perfect for young married couples that will sign up for mortgage and children further down the line. Term life insurance might work best if you choose your children as beneficiaries in case of death.

Whichever you choose make sure you do it for the right reasons. Having a safety net just in case something happens is always a good way to go and insurance can offer you that. In case you wind up not using it you can cash out the policy and have a nice retirement plan.

Let us know in the comments what kind of life insurance fits your life best and why. Share & Like if you agree that life insurance is something that would benefit a family’s future.