Types of Life Insurance 101

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Most of us are aware of the need to have some form of life insurance, particularly when we start a family. The type of cover we opt for is down to our financial circumstances and our personal preferences. Should your situation change, it’s possible to sell your policy for cash via a licensed life settlement company who will give you a dollar value based on your policy, age and health. Choosing this option means that you’ll receive a cash payment that is larger than the cash surrender value but less than the expected death benefit. The company will take over the premiums and they’ll be entitled to the death benefit when you pass away. Policyholders often choose to do this if they need cash to pay medical bills or to fund other related expenses. To start, there are two major types of life insurance, whole and term, with whole life encompassing several different sub-categories. Here we explain the differences.

Term Life Insurance

Term insurance will only pay out to the beneficiaries if death occurs during the term of the cover. This term can range from anything between one year and 30 years. Usually, there are no other benefit provisions attached to this kind of contract. Most buyers of term assurance opt for level term, which means that the death benefit remains the same throughout the whole duration of the policy. 

Whole Life 

Also called permanent life insurance, whole policies are the most common contracts in the U.S.  This type of cover will pay out to your beneficiaries whenever you die, even if you pass the magic 100 years mark! In addition to the death benefit, it also acts as a savings account. Under the whole or permanent umbrella, you’ll find three major types: traditional, universal and variable universal. 

Traditional Whole Life

If you buy this kind of policy, your premiums and the death benefit will remain at the same level throughout the full duration. To offset the increase in premium that would be required to insure you as you age, the company charges a consistent premium throughout the term, albeit at a higher rate than is necessary. These overpayments are invested and used down the line to supplement the level premium that you’ll be paying as you get older. Once these overpayments reach a specific amount, law states that they must be made available to the policyholder as a cash value should you decide to terminate the contract. This is an alternative rather than additional benefit. 

Universal Cover 

Sometimes called adjustable life, a universal policy is designed to offer more flexibility than traditional whole cover. It’s possible to increase the death benefit and there may be the option to alter your premium once you have enough money in your account to cover the insurer’s costs. However, you should also be aware that if you do reduce or stop the premiums, you may use up your savings which means you run the risk of your cover lapsing. 

Variable Contracts

This option is a combination of death protection and savings that can be invested in stocks, bonds and mutual funds. While your policy may grow more quickly, you’re also open to more risk from the fluctuations in the money market. If your investments have poor performance, the death benefit and cash value may be less than you expect, although some policies will safeguard a minimum death benefit. 

Variable Universal Life Insurance

As the name suggests, this contract offers a combination of the features of both the variable and the universal contracts. You’ll be able to invest your savings in stocks and bonds while retaining the option to adjust your death benefit and premiums as required.