In general, life insurance is a type of coverage that pays benefits upon a person's death or disability.
Types of Life Insurance Policies
In exchange for relatively small premiums paid in the present, the policy-holder receives the assurance that a larger amount of money will be available in the future to help his or her beneficiaries pay debts and funeral expenses. Some forms of life insurance can also be used as a tax-deferred investment to provide funds during a person's lifetime for retirement or everyday living expenses.
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Term life insurance would offer you protection for a pre-set term of one year or more. Traditionally sold as terms of 5, 10 or 20 years, your monthly premium will remain level throughout the life of your term policy. You will only be eligible for benefits during that term of years. Some term life policies are renewable for an additional term or more, but your premium will be higher each time you renew.
It’s important to remember that even though a term life policy will provide the largest cash benefit for your premium dollar, unlike whole life plans, term policies do not have cash value accounts.
Whole life policies would offer you benefits for life. You’d pay the same monthly premium for as long as you lived. Your premium will be larger than it would be for a similar amount of term life protection, but it will be lower than the premium of a renewed term life plan.
In general, your whole life policy will combine the framework of a term life policy and an investment component. First, there will be a mortality charge, meaning your actual insurance coverage. Second, there will be a reserve; your reserve is an investment component that will earn interest over time.
Loans and withdrawals from a whole life insurance policy, along with any accrued loan interest, will reduce the policy's death benefit. A policy loan could result in tax consequences if the policy lapses or is surrendered while a loan is outstanding.
Your universal life policy would offer you a variation of the standard whole life policy. There will be an insurance part of your policy that is separate from an investment portion. The investment portion of your universal life policy will be invested in money market accounts and your policy’s cash value portion will be set up into an accumulation fund.
You may have heard this kind of life policy called permanent insurance. It’s designed to provide you with protection for life. Cash value life insurance offers you an assortment of options. Your premiums will be flexible in certain cases and fixed in others. Your benefit may remain level, or it may increase. Your cash value policy will accumulate value over time. In most cases, the premium of your cash value policy will be higher than those of a term life policy.
Current assumption life insurance features a fixed annual premium for the duration of the policy. This type of policy pays a set interest rate on premiums received, less the actual cost of the insurance. They can be useful as a tax-deferred investment vehicle, since they usually pay 2 to 4 percent more than banks. Policy holders may elect to overpay their premiums early in the policy period to accumulate cash value. They can withdraw or borrow from the funds later for any purpose, including retirement income, or can use the cash value to pay the premiums for the remainder of the plan period. Loans and withdrawals from a permanent life insurance policy, along with any accrued loan interest, will reduce the policy's death benefit. A policy loan could result in tax consequences if the policy lapses or is surrendered while a loan is outstanding.
Most types of life insurance policies give individuals the opportunity to add optional coverage, or riders. One popular option is accelerated benefits (also called living benefits), which pays up to 25 percent of the policy value to the holder prior to their death if they are struck by a serious illness. Another option, known as a waiver of premium allows an individual to continue coverage without paying premiums if he or she becomes disabled. Many policies also provide an accidental death and dismemberment option, which pays twice the amount of the policy if the insured dies or loses the use of limbs as a result of an accident.
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