Regardless of how fancy the policy title or sales presentation might appear, all life insurance policies contain benefits derived from one or more of the three basic kinds shown below. Some policies combine more than one kind of life insurance and can be confusing. These are:
- Term Life Insurance
- Endowment Life Insurance
- Whole Life Insurance
- Variable Life Insurance
- Universal Life Insurance
- Variable Universal Life Insurance
Explanation of various types of insurance policies:
- Term life insurance is death protection for a term of one or more years. Some companies are offering policies with terms of up to thirty years. Premiums on term insurance remain level during the life of the policy. Term Life Insurance has no cash value account. Death benefits will be paid only if you die within that term of years. Each time you renew the policy for a new term, premiums will be higher. You should check the premiums at older ages and the length of time the policy can be continued. Some term insurance policies are also convertible.
- An endowment insurance policy pays a sum or income to you, the policyholder if you live to a certain age. If you were to die before then, the death benefit would be paid to your beneficiary. Premiums and cash values for endowment insurance are higher than for the same amount of whole life insurance. Whole life insurance gives death protection for as long as you live. In this type of policy, you pay the same premiums for as long as you live. These premiums can be several times higher than you would pay initially for the same amount of term insurance.
- The best life insurance policy with cash values may also be used as collateral for a loan. If you borrow from the life insurance company, the rate of interest is shown in your policy. Any money which you owe on a policy loan would be deducted from the benefits if you were to die, or from the cash value if you were to stop paying premiums.
- Variable life insurance provides permanent protection for you and death benefits to your beneficiary upon your death. The value of the death benefits may fluctuate up or down depending on the performance of the investment portion of the policy. Most variable life insurance policies guarantee that the death benefit will not fall below a specified minimum, however, a minimum cash value is seldom guaranteed.
- Universal Life insurance is a variation of whole or all life insurance policy. The insurance part of the policy is separated from the investment portion of the policy. The investment portion is invested in bonds and mortgages, the investment portion of universal life is invested in money market funds. The cash value portion of the policy is set up as an accumulation fund. Investment income is credited to the accumulation fund. The death benefit portion is paid for out of the accumulation fund.