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4 Types of Life Insurance: Term, Whole, Universal, Variable
Posted By Jim On 01/18/2008 @ 7:37 am In Insurance | 19 Comments
Who wouldn’t want to insure their life? It’s quite possibly one of the most valuable things I own and I would certainly like to be protected in the event I lose or misplace it right? Well, if you’ve gotten over the morbidity of the idea of buying life insurance and “shopped” around, you probably did exactly what I did – gotten thoroughly confused. What the heck is term life insurance and whole life insurance? What’s the difference between variable and universal? The worst part is that none of them are named in a way that makes it clear what exactly you’re getting. So, since one of my goals for 2008  was to figure out all these insurances and makes sure I’m covered, I’m forced to research it and try to decipher this complicated and likely very lucrative business.
Term life insurance is claimed to be the easiest of the life insurances to understand and is named “term” because you are protected for a certain period of time – a term. The idea behind this insurance is that you can cover a small period of time with a lot of coverage and little cost. The idea is that you could use this insurance to protect yourself if you take on a large debt, such as a mortgage. For example, let’s say you just signed up for a 30 year mortgage and you are the sole source of income for your family. You could use term life insurance to cover the balance of the loan for a set period of time so that your family wouldn’t be in trouble if something were to happen to you.
Whole life insurance means coverage for your entire life, as long as you continue to pay the premiums on time. Sometimes you can convert a term life insurance policy into a whole life insurance policy, so that’s always an option if you want to. As for the premiums, this is where the companies try to get you in early so that the payments stay pretty level as you grow older. Since you are less riskier when you’re young, the earlier payments essentially offset your later payments as you become older and riskier. The other main difference is that there is a guaranteed cash value for the policy that you can actually borrow from. As you pay premiums, a portion of that goes into the guaranteed cash value bucket that is available to you if you decide to surrender the policy later. How much and how quickly that accrues depends on the type of policy you have and other factors.
Another name for this is Flexible Premium Adjustable Life Insurance (universal life just sounds better). This is a flexible version of whole life insurance where you get the savings element of whole life. The insurance company will invest your savings, offer a guaranteed minimum, and you get those funds tax deferred. What’s flexible is that there are two death benefit options. The first is that they pay out the policy’s cash value. The second option is that they pay out the face amount of the contract plus any cash value you accumulated. The first option is cheaper because the company pays out less insurance and the second is more expensive because they pay out more. I’ll be entirely honest, I don’t fully understand this and this article is designed as a brief overview.
This is also called Variable Appreciable Life Insurance and it is basically part life insurance and part investment account. The variable refers to the idea that you can specify a percentage of your premium to go towards a separate investment account that can appreciate (or depreciate). While some places will claim there’s a minimum, since it is partly an investment, it is governed by the SEC and you get a prospectus with the policy. What’s nice about it is that you can get tax-free appreciation, until you end the policy, and the appreciation can go towards your premiums. The risk is that there is always a risk when it comes to investing (as you probably are feeling if you’re currently in the market, this month has been brutal).
There are a ton more types of insurances out there but these are the big four categories and I believe I’ve gotten their basics correct. If any of you have any expertise in this, please add clarification or corrections in the comments.
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 goals for 2008: http://www.bargaineering.com/articles/personal-finance-goals-for-2008.html
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