Different Types of Life Insurance Policies

Different Types of Life Insurance Policies

            Many individuals, businesses, and other entities have insurance as part of their financial planning. They use it to protect themselves against potential significant monetary loses or any financial hardships. It is a form of financial risk management where you pay the premium and in return, they pay you or your beneficiaries the quantity that is lost. The premium is the total you pay regularly, either monthly or annually, to get insured.

There are many reasons why individuals consider getting insurance. All of the reasons involve money. Some of them are getting money equivalent to what is lost to fire, flood and other disasters, insuring properties in case of theft, and financially protecting your family in case of unfortunate accident that cause disability or death.

Life Insurance

life-insurance

This is one of the best insurance available for individuals. You might want to consider having you life insured if you are the bread winner of your family, and all of the members depend on you. This is especially important your family use your income to cover the mortgage, education, and other living expenses. A life insurance will help your family in case of your untimely passing. A policy which covers the funeral expenses as well is even better option.

However, it can only provide for your family if you die and not if you are terribly ill or disabled. There are also other reservations in the policies. You are not covered by the insurance if you die because of drug and alcohol abuse. People who are engaged in dangerous activities such as risky sports must also pay higher premium for the insurance.

Life insurance is further divided into various types of policies.

Term Life Insurance

term-life-insurance

It is one of the most commonly used policy and one of the most affordable as well. This kind of policy covers you for a limited period of time, up to 30 years. After this term, the owner will decide if they will renew the policy. The premium you pay would depend on your age, health, and life expectancy; if the term is decided to be renewed, the amount of premium will change depending on your age by then. There is also an age limit, people 80 years and older would find it hard to get insured, though it is unlikely that you still need insurance when you are of this age.

This type is best suited for people who has an estimate on until when do they need insurance. If you think that your dependants will not need financial protection at a certain time anymore, you might get a policy up to that time only. If you die within the covered period, your designated beneficiaries receive financial support; insurance may also cover your mortgages, loan and other debts.

Universal Life Insurance

universal-life-insurance

It is similar to whole life insurance policy which will be discussed later. Here, you pay a premium and part of it goes to the insurance for the benefits, and another part adds up to your savings investment. Unlike in whole life insurance, interest rates in universal life insurance vary every month, and the interest can be used to pay the premium.

You can get the greatest benefits from this type insurance which can be adjusted according to your own lifestyle. However, instability of the interest rates and premiums poses higher risk than other life insurance policies do.

Death beneficiaries are granted the policyholders savings account in addition to the death benefits covered by the agreement.

Indexed Universal Life Insurance

indexed-universal-life-insurance

It is synonymous to equity indexed universal life insurance. In the premium you pay, part of it goes to the insurance and the rest are added to the cash value. The cash value grows because of the interest based on the equity index. So essentially, this type of policy has two purposes: to provide monetary support to your family in case of death, and to produce tax-free income during retirement.

The drawback here is that, indexed universal life insurance (IUL) can be compared to term life renewed every year. And as mentioned earlier, the premium you pay in term life insurance becomes higher as you age, so IUL has a continuously increasing rate every year. It eventually becomes very expensive, policyholders of this type are forced to end them.

Survivorship Universal Life Insurance

survivorship-universal-life-insurance

It used to be called “second-to-die life insurance”. It is different from the typical insurance that only covers an individual. Here, the policies insures two people, usually married couple, but could also be business partners. Designated beneficiaries would not get the death benefits until the second person dies. This is ideal for parents who want to make sure that their estate are inherited by their children. When they are transferred to the heirs, the insurance policy includes paying for its taxes.

Couples also choose this because it is more affordable, and easier to avail than other policies. Since both of the policyholders must die before paying out, survivorship insurance holders pay less premium, it is cheaper than availing separate policies for each person. It is also easier to buy than life insurance for individuals, even if one of the persons may not be qualified for another type of insurance, companies are willing to sign contracts for joint insurance policy. This is because they owe nothing to the beneficiary until both of the persons die.

Variable Universal Life Insurance

variable-universal-life-insurance

It is a combination of variable and universal life insurance, as the name suggests. It offers both insurance and investment options. Its policy holders can easily alter and adjust the insurance coverage and investments according to their needs. The amount and frequency of paying your premium would be up to you, though of course, the policy has set limitations. However, unlike most of life insurance policies, here you manage your own investments instead of the company.

Whole Life Insurance

whole-life-insurance

As its name suggests, whole life insurance protects the policyholder his/her entire life, as opposed to term life that only insures the holder at a certain period of time. Premiums for whole life insurance pay for both build up of the insurance and investments. The money you earn from the interest for investments are tax-free. Its cash value grows through the investment component, and the insured person can withdraw or borrow it. Another feature that makes it different from term life is that it has a living benefit and the family members receive cash after the policy holder passes away.

Variable Life Insurance

variable-life-insurance

It is a type of life insurance with an investment component. It is the major advantage that variable life insurance policy holders have; they can participate in investments without being taxed for their earnings. The interest earned can be used for the premiums, therefore lowering the amount you have to pay. However, depending on the investment funds’ performance, there could be some times where you earn less, so you may have to pay more than what you can afford for the premium. In addition, only your beneficiaries can use withdraw the cash value after you die.

Endowment Plans

endowment-plans

Endowment policy is a mix of term life policy and savings plan. Here, you can choose the fixed amount you want to pay every month and when do you want the policy to mature. This is best for people who are saving to prepare for a specific event that will take place in the future. It is usually bought by parents who are saving for the college education of their children. At the end of the term, you will get the sum of the savings you made which will pay for your children’s tuition. If you die within the term, you beneficiary will get the death benefits and the sum of the savings.

Unit Linked Insurance Plans

unit-linked-insurance-plans

Policy holders of this type have their lives covered while being able to invest at the same time. They have an option to invest in as much qualified investments they can. Unit Linked Insurance Policy (ULIP) is like a savings vehicle and insurance policy in one. Purchasing units in ULIP is like purchasing units in mutual funds, you purchase units with a large number of other investors.

Money Back Policy

money-back-policy

Money back policy is one of the most popular types of life insurance policy. It has two benefits for policy holder: life insurance and regular cash inflow at intervals during the entire term. This is perfect for people who have long and short-term financial needs in their lifetime at certain intervals. It is like a combination of term life and endowment plans. Policy holder gets regular money at intervals which is called the “survival benefits” during the term.

If the policy holder dies within the term, the death benefit that the beneficiaries get will be the total amount that the holder was able to pay during the entire term. The survival benefits that has been paid back prior to death will not be deducted.

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