Types of Life Insurance: Four Major Categories
There are actually four main Types of Life Insurance. With each company the policies and the definitions may vary a little. There could also be differences from state to state. The different types are Term Insurance, Whole Life Insurance, Universal Life Insurance and Variable Life Insurance.
Term Insurance
Of all the Types of Life Insurance the Term Insurance is the simplest one. The policy that you buy is for a specific period and has a specific price. In case of the policy owner's death, the beneficiary gets the value of the policy. Investment component is not existent in this policy at all.
It is a 100 per cent risk cover. If the policy owner survives the specific period, he is not entitled to any payment. The entire premium paid during the period is retained by the insurance company. The risk cover involved simply protects the family of the policy holder against his sudden death. Since he forfeits the amount if he outlives the period of the policy, it explains why the cost of the Term Insurance policy is low.
When the policy expires, the insured is given the option to renew it, but he has then to pay the revised rates of premium. Often the change of premium could be considerably high. This is one of the major disadvantages of this policy. Nevertheless, it is advisable for salaried youth and middle-aged men to opt for the Term Insurance Policy.
Whole Life Policy
The Whole Life Policy is very similar to the Term Insurance Policy. The only difference is that your whole life is covered with this policy and not just a fixed period. The premium is fixed and the company benefits from it because it can invest a portion of your premiums. Some companies even share investment proceeds with policy holders and issue them dividends.
The disadvantage of this type of life insurance is its failure to be useful to the insured during post-retirement years. Also the increasing needs of a person are not taken into account. When the insured buys the policy at a young age, his requirements obviously increase with time. So at his death the sum to meet his family's needs are often too low. Considering this disadvantage many insurance companies offer a modified version of this Whole Life Policy or do it in combination with another type of policy.
Universal Life Policy
The Universal Life Policy is often called the Universal Variable Life Policy and it is one of the Types of Life Insurance where policy holders can choose investment vehicles. The insured decides the insurance amount and the company makes the choice regarding the investment vehicle. These are often bonds and mortgages. There is a cash-value account and the investment with the returns flow into it. This can be used by the policy holder against premiums or it could be allowed to build.
Variable Life Policy
The Variable Life Policy involves a wider selection of investment products, like stock funds as well and is one of the most popular Types of Life Insurance. It operates like the Universal policy, and the returns on the investments can be paid for the cost of premiums or building in the account. Within this policy, there are again various types of variable policies, and accordingly the beneficiaries get the face value of the policy or the face value and all or part of the cash account.
