Should I Get Different Policies of Life Insurance?
Life insurance comes in the form of many different policies. Each policy type is designed for a different purpose. When choosing what kind of policy to buy, your choice depends largely on your financial goals. There are four basic policy types to choose from. Each one accomplishes something different.
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Term Life
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Term life insurance is basic death benefit protection. A term life policy provides guaranteed insurance coverage for a set number of years. When the term of the policy is over, the policy terminates. You may renew the coverage for a higher premium. Term policies may be purchased on an annual renewable basis or a level term basis. The annual renewable policy renews every year, while a level term policy provides coverage with level premium payments for up to 30 years. Term life is ideal when you just want basic death benefit protection and only need insurance for a set period of time.
Whole Life
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Whole life insurance increases the term policy premiums and extends coverage to age 100. The policy also provides a cash reserve, called a cash value, to you. This cash value is a savings you may use during your lifetime for any reason. Both the cash value and the death benefit are guaranteed. Whole life insurance is ideal for situations when you want to combine lifetime coverage with a savings element, but don't want to give up the guarantees inherent in a term policy.
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Variable Life
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Variable life insurance is best when you want to combine an investment component with your insurance policy. Part of the premium you pay on the policy goes towards an investment in mutual funds. This investment determines the cash value of the policy as well as the death benefit. Your policy values will fluctuate according to the performance of the funds you invest in. Your policy values won't decrease below the minimum guaranteed element in the policy, if one is stated.
Universal Life
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Universal life insurance is best when you want full control over the premium payment activity and the ability to adjust the death benefit up or down over your life. While there is a lot of flexibility in the policy, the trade-off is the risk involved. You share a substantial part of the risk in this type of policy. The insurer makes few, if any, promises about the cost of the policy aside from a maximum insurance charge. Likewise, a minimum investment interest rate may be specified. The assumption, however, is that the policy will experience charges lower than the maximum stated and investment gains higher than the minimum. If these assumptions turn out to be wrong, your policy could lapse and you could lose your death benefit and cash value.
Consideration
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In many cases, it might be wise to have more than one type of policy. For example, a term policy can cover your mortgage on a guaranteed basis, while a universal life, variable life policy or whole life policy can help you save money for retirement through the cash value account and provide additional life insurance death benefit if you need it.
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