Types of Life Insurance
Essentially, life insurance is a contract between the provider and the insured individual that directs the insurance company to pay out a certain sum of money, known as the “death benefit”, to a designated beneficiary should the insured individual die. There are really just three basic categories of this kind of insurance: Term Life, Whole Life and Universal Life.
Term life is the kind of coverage that is least costly. It’s is active for a pre-determined period of years, after which it ceases to be in effect. Terms are usually anywhere from 10 to 20 and even 30 years. During these terms the premiums remain constant but when a term ends a new one must be negotiated, usually with higher premiums.
Whole life is different in that it is a form of coverage that can be permanent, spanning the entire life of the insured. Like premiums under term life, whole life payments are also fixed, however they tend to be more costly than term premiums. There are, though, two other distinguishing aspects of whole life: One, the premiums paid extend over a lifetime. Two, whole life also has a savings component in which the cash value accumulates in time. This accumulated value is tax-deferred and can be cashed out if needed, though taxes would apply upon doing so. You may also borrow against the accumulated cash value, thereby perhaps avoiding being taxed. Basically, there is more flexibility with this coverage.
Universal life is another form of permanent life insurance, but here the premiums vary by virtue of what the insured individual chooses to do with the earned interest gained from the accumulated cash value. Here the cash value also grows. This is the most flexible form of permanent life with the death benefit, the premium levels, and the savings component all being adjustable by the insured should his or her life situation change. The insured can also put to work the interest earned to help pay premiums.
Ask your insurance agent about what might be best for you and your family.