Are There Different Types of Life Insurance I Should Consider?
Many different types of life insurance exist, and each policy has its proper place in protecting the financial security of the policyholder. Each person's financial situation differs from the next, and understanding the different types of life insurance policies can make planning for the future and protecting your heirs a less stressful and confusing task.
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Term Life Insurance
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Term life insurance provides coverage for a specified period of time. For the duration of the term, typically between 10 and 30 years, your premium and death benefit remain fixed. At the end of the term period, you stop paying and the carrier stops covering you. Unless other arrangements have been made, you will no longer be covered by the policy. Most term policies contain provisions allowing you to convert the policy to a permanent one without the need for additional underwriting.
Whole Life Insurance
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Whole life insurance provides coverage for the rest of your life and is the oldest form of permanent life insurance. However, sales of whole life policies continue to decrease as consumers seek alternatives with lower premiums and better features. Like any permanent policy, premiums for whole life coverage remain fixed for your entire life, and your death benefit never decreases.
A small portion of every premium payment gets set aside into a separate investment account, called the "cash value" portion of the policy. In a whole life contract, the insurance carrier invests the money as it sees fit and credits the cash value with a guaranteed minimum interest rate. If sufficient proceeds are generated from the company's investments, you may also receive additional credits in the form of dividends.
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Universal Life Insurance
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Like whole life, universal life insurance covers you for the rest of your life. Your premium payments and death benefit typically remain fixed for as long as you maintain the coverage, and your policy accrues cash value. At a glance, universal life and whole life appear very similar, and for the average consumer these policies provide the same benefits. However, universal life insurance contracts provide owners with some flexibility regarding premium payments and death benefits.
With a whole life policy, your cost and coverage remain fixed, and as long as you continue to pay your premiums, the coverage will never lapse. With a universal life policy, you can increase or decrease premium payments according to your needs, but coverage will terminate if the cash value is insufficient to cover the cost of insurance.
Variable Life Insurance
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Variable life insurance also provides permanent protection, and contracts have fixed premiums and death benefits. But unlike whole life and universal life policies, you make the decisions regarding how the cash value portion is invested. Variable life insurance contracts contain a list of available investment choices, called sub-accounts, which are typically clones of popular mutual funds. If the sub-accounts you choose perform well, your cash value increases. Conversely, if your sub-account choices perform poorly, your cash value may decrease, threatening the stability of the policy.
Second-to-Die Life Insurance
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In the mid-1980s, second-to-die life insurance policies began growing in popularity. Usually purchased by wealthier families, these actually cover two people, typically a husband and wife, and pay out the benefit only upon the death of both people. Second-to-die life insurance provides a safe and effective method of paying both estate taxes and the probate attorneys fees' incurred during the settlement of a couple's estate. Thanks to the unlimited marital deduction laws, estate tax liability can be further delayed after the death of one spouse, making second-to-die policies a wise purchase for couples concerned about estate and inheritance taxes.
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