There Are Different
Kinds of Life Insurance
Life insurance policies are issued in two basic
types: term life and permanent life.
Term life insurance, in a level term form,
requires fixed, regular premiums and pays the death
benefit, also called the principle sum, only if the
insured dies during the policy's term. There are no
cash values built under these policies.
Whole life insurance also requires fixed, regular
premiums and pays the death benefit when the insured
dies. Because the level premium in the early years
of such a policy exceeds the average cost of claims
and expenses there are moneys available to be
invested. The policy owner has access to these
invested amounts via the policy's surrender value.
Surrender values are not usually available in the
first few years of the policy because of high
initial expenses. In this sense a whole-life policy
has an investment component. Therefore, whole-life
insurance is more expensive than term life.
Documents that may be required for payment on
life insurance include a certified, official copy of
the death certificate stating that a person died on
a particular date. A claim form from the insurance
company would also usually be required to be signed
by each beneficiary or their representative.
Types of Life Insurance
Term Insurance
Term life insurance is a type of life insurance
that is temporary, as it covers only a specific
period of time, the relevant term. It can be
considered pure insurance because it builds no cash
value. This is in contrast to permanent life
insurance such as whole life, universal life, and
variable universal life.
Term insurance is the cheapest way, in the short
run, to buy a given amount of insurance death
benefit on a coverage per premium dollar basis.
Annual Renewable Term
The simplest form of term life insurance is for a
term of one year. The death benefit would be paid by
the insurance company if the insured died during the
one year term and no benefit is paid if the insured
dies one day after the last day of the one year
term. The premium paid is then just the expected
probability of the insured dying in that one year
plus a cost and profit component for the insurer.
Since the likelihood of dying in the next year is
low for anyone that the insurer would accept for the
coverage, purchasing one year of coverage is not
generally done, nor cost effective. A variant that
is commonly purchased is annual renewable term
(ART). In this form, the premium is paid for one
year of coverage, but the policy is guaranteed to be
able to be continued each year for a given period of
years. This period varies from 10 to 20 years, or
until age 95 sometimes. In this form the premium is
slightly higher than for a single years coverage,
but is much more likely for the insured to have the
benefit paid.
Level Term
Much more common than annual renewable term
insurance is insurance where the premium is the same
for a given period of years. The most common periods
being 10, 15, 20, and 30 years. In this form, the
premium paid each year is the same, and is the cost
of each year's annual renewable term rates averaged
over the term, with a time value of money adjustment
made by the insurer. Thus the longer the term the
premium is level for, the higher the premium,
because the older, more expensive to insure years
are averaged into the premium.
Permanent Insurance
Permanent life insurance is a form of life
insurance such as whole life or endowment, where the
policy is for the life of the insured, the payout is
assured at the end of the policy (assuming the
policy is kept current) and the policy accrues cash
value.
Permanent life insurance originally was offered
as a fixed premium fixed return product known as
whole life insurance. This offered consumers
guaranteed cash value accumulation and a consistent
premium. As consumers became more savvy, they wanted
more flexibility which was offered in the form of
universal life insurance. Universal life insurance
allows consumers flexibility in when premiums are to
be paid and the amount that they would be. Universal
life policies also allowed consumers to permanently
withdraw cash from the policy without the interest
associated with the loan provisions in whole life
policies. Universal life policies retained the fixed
investment performance of whole life policies.
Variable life insurance follows the mold of whole
life, but it shifts the investment risk to the
consumer along with the potential for greater
returns. Variable universal life insurance combines
this with the flexibility in premium structure of
universal life to create the most free form option
for consumers to manage their own money (at their
own risk). Variable universal life insurance
policies are popular with investors in the United
States due to the favorable tax treatment of all
permanent life insurance policies and their
potential for significant returns.
To determine how much insurance you need to
replace your current income visit the following
link:
http://www.life-insurance-companies.com/coverage.htm
Note: the
information provided for each of the companies
listed has been edited for content and is provided
in full on their respective websites.
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