Understanding How Life Insurance Works

Choosing a life insurance policy that is right for you can be a difficult process. There are so many different types of life insurance, each with their own financial benefits and costs. Without knowing what each policy covers or how they work it can be impossible to decide. Someone who specializes in one particular type of life insurance may not be informed of what other policies have to offer. Here you will find the different policies that are available and how each one works.

Term Life Insurance Policy

This type of life insurance policy is usually the most affordable. A term life insurance policy covers you for a set amount of time usually between ten and thirty years. There is no cash value to this type of policy. If you die in that set time period the policy will pay the face value. There are two types of term policies a level term and a decreasing term. A level term policy will pay the same amount upon death no matter how far into the policy you are. A decreasing term policy will pay less upon death the later into the policy you are.

Permanent Life Insurance Policy

This form of life insurance is sometimes referred to as a cash value insurance policy. It is a policy that can also be used as a savings account. The insured is able to choose which part of the plan, the savings part or the actual insurance premium part, they wish to invest in; whichever is best for the policyholder at the time. If the savings rate is high you can choose to put more into savings although this could affect the amount of death benefits paid out. If the savings rate is low you can pay insurance premiums instead. A benefit to a permanent life insurance policy is that the policy is renewable and the premiums are fixed based on information given at the time the policy is purchased. One negative factor of a permanent life insurance policy is fees that are charged for setting up and maintaining the policy.

Whole Life Insurance Policy

This is the most common form of permanent life insurance available to you. In a whole life policy the premiums are fixed and applied equally between savings and insurance. This policy is in effect through the duration of the insured’s whole life at a fixed rate. The death benefits will also remain the same for the duration of the policy. Most whole life policies require the insured to pay premiums throughout the duration of the policy while others may allow the policy to be paid up with a few larger payments or in some cases one lump sum. In the case of payments made throughout the duration of the policy, some institutions may refund over payments made throughout the year. These refunds are not taxed because they are considered an over payment of premiums. When choosing a whole life policy you want to research how the policy can be paid and if there are over payment refunds.

Variable Policies

There are two types of variable insurance policies. The first is variable life insurance, which offers an investment aspect to the policy rather than a simple interest bearing savings option. These plans allow the insured to select which investments to put their money into and can typically do very well with rising stock markets. In case of a fall in stocks these policies also usually offer a minimum death benefit. The second type is a variable universal life insurance policy. This type of policy allows the insured to choose investing options for the savings aspect of the policy as well as allowing movement between the insurance and savings portions of the policy. Many investment advisers recommend this type of policy because of the tax benefits associated with it.

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