Types of Life Insurance Policies
Written by Tina Phu, Dongmiao Cui   

For those not familiar with life insurance, there are two types of policies: term insurance and whole life insurance. The following will inform you of the details of each type of policy.
  1. Term insurance (pure insurance coverage, temporary insurance)
“Term” means that such life insurance covers a specified term of periods for a specified premium. This policy purely protects your from death, and does not accumulate cash value. It is offered for periods ranging from 1 to 30 years, and purchased year-by-year. You don’t have to show proof of good health each year in order to qualify.

This policy requires you to pay a premium. In return, it guarantees that if you die during the term of the policy, it will pay a death benefit to your beneficiary. If you are still alive after the term of the policy is over, you will receive nothing.

The key factors to be taken into account are Face amount (for protection or death benefit), Premium and Term (length of coverage). The face amount can stay constant or decrease. The premium can remain constant or increase. The term can be for one or more years.

Common types of term insurance include Level, Annual Renewable and Mortgage insurance, as is compared in the table below.

Academic Year
 Premium
 Term
Level Term Fixed 5, 10, 15, 20, 25, 30, and 35 years (for long term planning)
Annual Renewable Term Depending on the insured's age 1 year
Mortgage Insurance Fixed premium and declined face value To be specified
 
For this type of insurance, premiums are low and very affordable. As you grow older, premiums steadily increase.
  1. Whole life insurance (permanent insurance, cash value)
This type of policy basically combines life coverage with an investment fund and offers lifetime protection. Its major advantages include guaranteed death benefits, fixed annual premiums, and mortality and expense charges will not reduce the cash value.  Whole life insurance is effective for the rest of your life. In addition to the guarantee of paid benefit upon your death, there will always be amount that can be borrowed against or cashed out if you need it before you die.

Whole life insurance is a permanent insurance policy with an investment fund tied to a stock or bond mutual-fund investment. Returns and dividends are not guaranteed. The death benefit may increases if dividends are utilized to purchase additional death benefit. Compared with term insurance, the premiums of whole life insurance are higher in the short-term. However the premiums can also be reduced by the unguaranteed dividends.

Under whole life insurance, your policy may be "fully paid up" by the time you’re 65 years old. It just means that you have made enough premium payments to cover the cost of insurance for the rest of your life.

Other life insurances include:
  • Universal life insurance that provides flexibility in premium payment;
     
  • Limited-pay which allows all premiums to be paid over a specified period;
     
  • Endowments, in which cash value mount to the death benefit at a certain age;
     
  • Accidental death, which is designed to cover accidents.

Tip: Keep investments and insurance policies separate; there are better places to invest.
Last Updated on Sunday, 26 December 2010 20:18