What Is Good Life Insurance?
Life insurance is a financial contract that allows you to protect your family when you die. What are you protecting them from? In a word: debts. You may have financial obligations that never get paid off prior to your death. If you die before these debts are paid off, your family will inherit them. They may be financially ruined because of this. To prevent this from happening, choose good life insurance protection.
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Term Life
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Term life insurance provides temporary protection in exchange for a premium. A premium is the cost to provide the death benefit protection of the contract. Term policies may be purchased in terms ranging from one year up to 30 years. When the contract renews, the premium is guaranteed to increase. This type of policy is best when you only need life insurance for a set number of years. If you choose this policy type to protect your family, you must accumulate a savings equal to your remaining debts by the time the term policy expires. If you don't, your family will be inadequately protected.
Whole Life
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Whole life insurance provides lifetime insurance protection; the policy matures at age 100. To accomplish this, the policy earns a cash reserve that accumulates against the death benefit. At age 100, the cash value equals the death benefit. Before this time, the cash value represents a savings you may use at any time and for any reason through life insurance policy loans. Whole life insurance guarantees that your death benefit will remain in force as long as all premiums are paid and there are no outstanding policy loans. The cash value is also guaranteed to grow at a set rate each year. This policy type is good when you want or need a savings, don't have much investment experience and also need a death benefit to protect your family. You should be able to commit to many years of premium payments before you take out a whole life policy.
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Variable Life
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Variable life insurance offers fewer guarantees that whole life, but allows you to invest some or all of the premium you pay into mutual funds. The portion invested in mutual funds is not guaranteed in the policy. Your death benefit and cash value will fluctuate according to how much is invested in these mutual funds. Any amount invested in the insurer's fixed interest account will be guaranteed. This policy is good when you want the potential for higher death benefit and cash value amounts than are possible with a whole life policy, and do not mind giving up the guarantees of whole life.
Universal Life
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Universal life insurance is the most complex form of life insurance. The company shifts all of the risk of the mortality charges onto you, the policyholder. This means that the cost for the insurance policy can change over time, and you assume the risk when they do. Premiums are paid into the cash value account, and the cost of insurance is deducted from it. Then, the company credits the policy cash value with interest based on the investments of the policy. When there is no more money in the policy's cash value, the policy terminates. This policy allows you to increase or decrease the amount of death benefit you purchase at any time during the contract's term. The policy normally matures at age 120, but this may vary according to the issuing insurer. Premiums may be increased or decreased at any time. As long as there is money in the cash value account to pay for the cost of insurance, no premiums are required from you. While this policy gives you maximum flexibility, it also imposes specific responsibilities on you. The cost of insurance may fluctuate up to a contractually guaranteed maximum. Interest earned in the contract may not fall below a contractually guaranteed minimum. Other than that, there are no specific guarantees in the contract. The policy normally operates on the assumption that interest earned in the policy will be greater than the guaranteed minimum, and that costs of the policy will be less than the contractually guaranteed maximum. Use this policy type only when you are ready to take on these risks in your life insurance policy in exchange for the increased flexibility you gain from it.
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