Types of Life Insurance
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What are the types of life insurance? First, life insurance can be broken into two main types, term and permanent. Let’s take a brief look at both. (Keep in mind the cost and availability of life insurance depends on several factors such as your health, your age and the type and amount you buy.)
Term Life Insurance
Term life is pretty straightforward – it is also usually the least expensive type to buy. Generally speaking, policies are purchased for a specific period of time, such as 5, 10 or up to 30 years. The longer the term, the more expensive the policy. That is, a $100,000 10 year term policy will cost less than a $100,000 30 year term policy. What is attractive about term life, is the premium is guaranteed for the length of the policy. Keep in mind that when the term of your policy is over, you have to re-qualify to buy more. Therefore, if you are looking to have insurance for 20 years, buying a 20 year policy can be more beneficial than a 10 year policy if say your health changes during the first 10 years that might prevent you from buying another policy at the end of the first 10 year term.
As long as you pay your premium, you have insurance. You can stop paying your premium anytime – but your policy will be cancelled.
Permanent Life Insurance
With permanent life insurance, you pay a premium for as long as you own the policy. Permanent life insurance differs from term insurance in that it usually has a cash value. In general, the cash value is created because the premium is greater than the actual cost of insurance. There are three types of permanent life insurance, whole life, universal life and variable universal life.
Whole life has a premium that stays the same for the life of the policy. You may be able to borrow against the cash value or take a partial withdrawal of the cash value. Generally, out standing loans and partial withdrawals reduce the death benefit and the cash value. With whole life, the cash value is invested in the insurance companies general investment account.
Universal life is similar to whole life but with greater flexibility. You can still access your cash value through a loan or partial withdrawal. The cash value, again created by the premium being more than the annual cost of insurance, is invested in a separate account – not the general investment account of the insurance company. The interest rate you earn on your cash value varies with the market. The monthly cost of insurance is deducted from the cash value account. As the cash value accumulates and depending on the amount of interest earned, it may be possible to lower the amount, altogether stop or change the frequency of the premium paid into the insurance policy.
Variable Universal Life
Variable universal life provides the same flexibility of universal life except it also allows you to invest your cash value in stock, bond and money market funds. Because of these investment options, there is more risk to the cash value. If the cash value drops due to market fluctuation, you may need to make additional premium payments to cover the cost of insurance.