Life Insurance Explained

What are the principal types of life insurance?


Life insurance is an important component of financial and estate planning. When looking for insurance, you may come across plans that fit into one of two categories: term life and permanent life (also commonly referred to as whole life). Knowing the main differences between these two types of insurance can help you choose the right coverage options for your needs and goals.
Remember that group insurance policies, or policies that cover a group of people under a single contract (e.g., coverage provided by an employer), can differ from individual policies. The following data pertains to products that are commonly offered to individuals.


How does term life insurance work?


A term life insurance policy is purchased for a specific amount of time, such as one, five, ten, or even thirty years. Because coverage expires after that term ends—hence the name—a payout is only made if the insured dies during that period. If the insured person lives longer than the length of the original policy, the coverage may be renewed, but the premiums may be higher.


How does term life insurance work?


For many people, a term life policy may be the most straightforward alternative for life insurance. A death benefit can replace the income you would have received for a specific length of time, such as until a minor aged dependent reaches the age of majority. It can also be used to pay off a big debt, like a mortgage so that the person’s surviving spouse or other heirs don’t have to.

When looking at life insurance, you may come across the term “cash value.” Term life insurance does not accumulate cash value. Your premiums go toward your payment, resulting in reduced costs for policyholders than with permanent life insurance. However, some insurers have produced term life plans with a “return of premium” option, which returns a portion of your premiums if you don’t file a claim before the coverage period ends. These policies can be more expensive than traditional term life insurance upfront.

Term life can be divided into two categories: level term and decreasing term.

The death benefit of level term life insurance remains constant throughout the policy.
Decreasing term life insurance lowers potential death benefits over the policy’s term, which is usually one year.


What is the difference between permanent and whole life insurance?

Permanent life insurance, also known as whole life insurance or cash value life insurance, provides coverage for the duration of the insured’s life as long as premium payments are current. These plans, unlike term life insurance, may accumulate cash value, which a policyholder or their heirs might obtain under specific circumstances. As a result, premiums may be greater than for term life policies. Whole life products are made up of different types, such as real conventional life, universal life, variable life, and variable-universal life.


How does “cash value” work?


Premiums paid for permanent life insurance go toward the expense of insuring you, policy fees, and the accumulation of cash value. Both the death benefit and the premium are normally meant to stay the same level throughout the policy duration in classic whole life. However, as you become older, your insurance premiums might skyrocket, especially if you live past the age of 80.

Life insurance would become expensive for many people in their later years if premiums increased year after year. Instead, the insurance company charges a larger premium throughout the length of coverage than is required to settle claims in the policy’s early years. This money is invested and used to augment the level premium when needed to help defer the cost of covering elderly policyholders.

When these “overpayments” reach a particular amount, they are required by law to become available to the policyholder as a cash value, which accumulates in a savings account. The policyholder can withdraw or borrow against the accumulated cash value under specific circumstances. It’s vital to realize that cash value is usually restricted as a living benefit, with the insurance company keeping the money after the insured passes away. The death benefit may be reduced if you take out any debts against the cash value.

Which is better for me: term life or permanent life?


All permanent or whole life policies normally provide coverage for the rest of your life, but they might be more expensive than term life insurance. As a result, for the same amount of money, your death benefit may be lower than with term life. People who choose whole life insurance are more likely to like features that help them reach their own financial goals, like being able to budget for predictable payouts and premiums and being able to build savings tax-free through the cash value part of the policy.

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