Different Types of Life Insurance
There are two major categories of life insurance: permanent and temporary. Within those two categories there are several subcategories: whole life, universal, term, and endowment life. Whether or not any of these specific types of life insurance are right for you depend on your financial situation, the size of your family, the kind of work you do and even which company you purchase your policy through, which again is why it is so important to speak with a qualified insurance agent like those at Joe Karsner & Associates.
Permanent Life Insurance
Permanent life insurance means policies don’t end until the insured either passes away, or the policy reaches maturity, usually at the age of 95-100 years, depending on the terms of the individual policy. A permanent life insurance policy cannot be cancelled by the insurer unless the policy was obtained under fraudulent circumstances (e.g., the application for the policy was fraudulent) and is cancelled within a pre-determined amount of time after its creation. This amount of time is determined by the laws of the state of the policyholder and the state in which the insurer resides. Permanent insurance works by accumulating a cash value over time. This cash value reduces the risk to the insurer, bringing down the cost of the actual insurance as it does. One of the benefits that permanent life insurance has over temporary insurance is that the policyholder can borrow money against the policy, or “surrender” the policy and collect the cash value that has been paid in, thus terminating the policy. If the insured does borrow against the policy the money must be paid back before death, or the final payout amount to your survivors is decreased.
Within the “Permanent Life Insurance” category there are several smaller sub categories: endowment, whole life, and universal life.
Endowment Insurance (Permanent)
Endowment insurance works a little bit differently than your ‘typical’ insurance policy. With endowments, the cash value you pay in is the equivalent to the death benefit that is paid out. An endowment policy is paid after a specific amount of time has passed (depending on the individual policy) or the policyholder becomes a specified age- whether the policyholder is alive or not. These policies also tend to cost more annually, because the endowment period ends sooner than with traditional insurance.
Whole Life (Permanent)
Whole life insurance means, as its name states, that it is with the policyholder for his or her whole life. Beyond this, there are different directions the policy can take, such as whether or not you must pay annual premiums or whether your policy is paid for a definite amount of time. This will depend greatly upon the individual policy. The benefits of whole life insurance include guaranteed death benefits, fixed premiums, and no reduction to the final payoff amount due to expenses incurred over the life of the policy. That being said, the final payoff amount still can decrease, but this is dependent on whether or not the insured borrows against the policy.
Universal Life (Permanent)
Universal life insurance is a newer form of permanent insurance which was created to allow the policyholder to have more control over the payment of premiums and rate of return. Universal policies work by combining a cash account with a death benefit to survivors. The cash account increases as premiums are paid and interest from the premiums accrue. If interest rates are high, the money accrued in the cash accounts increases and reduces the premiums. If the interest rates remain above the minimum specified level, the customer is allowed the flexibility to pay less in premiums because the difference is made up in interest on the cash account. Upon the death of the policyholder, any money in the cash account is used to cover administrative costs and mortality charges. If more remains beyond that, it is disbursed to the beneficiary as part of the death benefit. The thing to remember with a universal life policy is that premiums are not guaranteed, and are subject to increases and decreases based upon the current interest rates.