Differences Between Life Insurance Policies

There are many different types of life insurance policies. However, you should spend some time figuring out which type of policy is going to be the best for you and your family, because it's likely you'll keep this policy for your whole life.

Types

There are two main types of life insurance: term life insurance and permanent life insurance. Within these categories, there are several different sub-types. However, the essential difference between life insurance is that the insurance policy either has the potential to build cash value or it does not.

Benefits

Cash value policies offer two benefits. First, cash value policies offer death benefit protection. They also offer a cash value savings that earns interest based on either the insurance company's general account (fixed interest) or the insurance company's separate account. This cash value acts as a savings that can be used throughout your life for any purpose you choose. Term life insurance offers low cost death benefit protection which is simple to understand.

Drawbacks

Term life insurance is short-term. The policy has a specified term, and when that term is up, your insurance protection ends. If you need insurance beyond that period, you'll have to re-qualify for insurance. Cash value insurance may or may not be guaranteed depending on your policy. Also, cash value policies may not earn as much money as a separate investment account.

References

• "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007
• "Ernst & Young's Personal Financial Planning Guide, 5th Edition"; Martin Nissenbaum, Barbara J. Raasch, Charles L. Ratner; 2004
• "Life & Health Insurance, License Exam Manual, 6th Edition"; Dearborn Financial; 2004