What Types of Life Insurance Policies Might Be Right for You?
Types of Life Insurance Policies - Term and Whole Life
Types of life insurance policies can be lumped together in two principal categories: Term Insurance and Whole Life Insurance. Generally, when it comes to individual life insurance policies, about half of those purchased represent some form of Term policy, while the other half represent some form of Whole Life policy.
Types of Life Insurance Policies - Term Life Insurance
On the "Term" side of the spectrum, there are only two types of life insurance policies - "Level Term" and "Decreasing Term." Level Term Life Insurance policies pay the same death benefit throughout the term of the contract, while Decreasing Term Life Insurance policies pay a declining death benefit in each year during the term of the contract. According to the Insurance Information Institute, nearly all Term Life Insurance sold today (97%) is Level Term.
When it comes to the various types of life insurance policies, Term Life is pretty simple. The contract holder pays an agreed upon premium to maintain agreed upon death protection over an agreed upon term. Term insurance is relatively inexpensive for the amount of coverage provided, but statistics reveal that only 1% of term policies are still in place at the death of the insured. Term life insurance is a good tool for short-term planning, such as covering a partner in a business venture or a single-income household during the primary child-rearing years.
Types of Life Insurance Policies - Whole Life Insurance
When considering the Whole Life category, the types of life insurance policies expand considerably. Whole life insurance policies include traditional permanent life, universal life, variable life, and variable universal life. In addition, there are numerous hybrids and attachments that make financial planning with Whole Life insurance policies rather intriguing!
Generally, Whole Life insurance pays a death benefit whenever the insured dies. In the case of traditional whole life (also known as permanent life), the premium and death benefit remains level throughout the duration of the policy. The insurance company keeps the premium at a level rate by charging a higher premium than needed in the early years, when claims are lower, and investing that money to cover the higher premiums and benefits that arise in the later years. By contract, the policy holder has access to the overpayments in the early years once they reach certain cash values. This is where financial planning gets fun, since the policy holder can maintain a policy's dividend-accrual and death benefits, while borrowing against the cash value to self-finance major life purchases. This is Personal Equity Institute’s “Be the Bank” Process that, when utilized properly, becomes an extremely powerful wealth building tool.