Types of Life Insurance Policy
A life insurance policy is a contract take by the policy holder from an insurer in order to assure him or herself of the availability of monetary assistance in case of injuries, illness or death.
A life insurance is essentially a contract between the policy insurer and the owner of the policy or policy holder wherein the policy holder pays the insurer a certain amount in exchange for benefits in case of untoward events that may happen which are covered in the policy. In a life insurance policy, the insured event is based upon the life or lives of the insured.
Life insurance policies often insure events such as death, diagnosis of terminal illness, and diagnosis of critical illness, disability due to ill health, permanent disability, accidental death and requirement for long term care.
There are two basic classes of life insurance. The first is the temporary or term life insurance. This type of insurance provides insurance coverage for only a specified number of years for a specified premium. This type of insurance policy does not accumulate cash value over time. A “term” life insurance policy is considered a pure insurance policy wherein the premium buys protection only in the case of death.
The other type is permanent life insurance. This type of life insurance remains in force until the policy matures unless the policy owner fails to pay the premium when it is due. Also, the insurer cannot cancel the policy for any reason except for a fraud in the application in which case such action must be filed within a period defined by law.
A permanent life insurance accumulates cash value that reduces the amount of risk to the insurance company thus reducing the insurance expense over time. To illustrate, a million-dollar face value policy can be relatively inexpensive to a seventy-year-old individual since the actual amount of the purchased insurance is less than one million dollars. The owner of the policy can access the money in the cash value by withdrawing the money, borrowing the cash value, or surrendering the policy and receiving the surrender value.
There are also three basic types of permanent insurance. These are whole life, universal life, and endowment insurance.
Whole life insurance owners have a level premium and a cash value table included in the policy which is guaranteed by the company. Whole life insurance has the advantages of guaranteed cash values, guaranteed death benefits, fixed annual premiums, and mortality and expense charges that will not reduce the cash value shown in the policy.
Cash values in while life insurance policies can be accessed any time through policy “loans.” These loans decrease the death benefit if unpaid, thus payback is optional. Upon death, cash values are not paid to the beneficiary. The beneficiary may only receive the death benefit. However, in many policies the cash value has been automatically used to purchase additional death benefit. Thus, the beneficiary is likely to receive more than just the base death benefit.
Universal life insurance is a relatively new insurance product. It provides greater flexibility in premium payment and a high potential for internal rate of return. This type of insurance includes a cash account. Premium payments increase the cash account and interest is paid within the policy on the account at a rate specified by the company. This rate has a guaranteed minimum but usually the amount is higher than that minimum.
With endowment life insurance policies, the cash value built up inside the policy equals the death benefit at a certain age. The age when this commences is known as the endowment age. These types of life insurance are considerably more expensive as the premium paying period is shortened and the endowment date is earlier.
by Maria-Goldsmith 19 years ago