Life insurance is a contract between an insurer and an insured. The contract is called a policy. If the insured dies during the coverage period of the policy, the beneficiary of the policy will receive a death benefit which is a sum of money. The death benefit is usually paid in one single payment. The beneficiary of the policy is chosen by the insured. There can be more than one beneficiary. There can also be a contingent beneficiary designated in case the primary beneficiary dies before the insured dies.
Term life insurance operates for a certain period of time. Premiums are guaranteed not to rise during the term of the policy which can be anywhere from 10 to 30 years. These are called level term policies. If the insured does not die during the term, premiums will increase after the term lapses. Premiums are likely to increase annually thereafter. As opposed to most other kinds of life insurance, term life insurance has no cash value. After the term has lapsed, most term policies permit the insured to convert their coverage to a permanent policy. Quite often, conversion can occur regardless of the condition of the insured’s health.
Whole life insurance is another form of life insurance and is more expensive than a term policy. Premiums are higher, but the insurer guarantees that the insured will be covered by life insurance for the rest of their life. The insurer will pay the death benefit whether the insured lives for 5 years or 75 years. As opposed to term insurance, whole insurance accumulates a cash value over the years. Cash value is a return on part of the premium that the insurer invests. This remains tax free until the insured either withdraws it or borrows against it.
Universal life insurance is somewhat of a hybrid between term and whole life insurance. Premiums are variable. They’re detailed by the insurer into insurance and savings. Savings can be used to reduce the amount of premium payments. An insured could temporarily stop making premium payments so long as the cash value is sufficient to pay them. Theoretically, if enough money accumulates in the savings portion of the policy, premiums might not even be required to maintain coverage. Most insurers permit the insured to borrow against the cash value of the policy.
Variable life insurance is a fairly new creature in the insurance industry wherein the insured is permitted to invest the cash value of the policy into mutual funds. The mutual funds then use pooled money from their universal life insureds and other individuals to invest in securities. By investing the policy’s cash value, the insured might be placing their policy at risk if the stock market crashes. This could result in payment of additional premiums to keep the policy current.
As can be seen, there are many life insurance options available. No single policy can cover everybody in every set of circumstances. An experienced agent is in the best position to advise the consumer.