DIFFERENT TYPES OF LIFE INSURANCE POLICIES
What are the types of life insurance available?
Life insurance can be broadly classified into term and whole life, which is otherwise known as permanent life insurance and comprises of many sub categories like traditional whole life, universal whole life, variable life, variable universal life etc.
The number of products sold under the term and life insurance varies and it is influenced by the consumer demand, prevailing economic situation, extent of motivation by the insurance agents etc. and whole life policies were slightly preferred over the term for the obvious advantages.
The nature of life insurance products sold to groups differ from that of the individual policies and the details discussed below hold good for individual products.
Term insurance can be safely said as the simplest form of life insurance and benefit is paid only at death and the term period may range from 1 to 30 years. The disadvantage in the term insurance is that they have no other provisions for benefit.
The term insurance can be level term and decreasing term. As the name suggests, level term means the death benefit remains the same throughout the period of policy and in decreasing term policy, the death benefit drops on an annual basis during the course of the period. It is not surprising that more than 95% of the policy is term.
Whole life or Permanent policy
In this case of permanent insurance, death benefit is paid irrespective of the age you live, even if it is more than 100! This whole life / permanent product is again divided into three major divisions into traditional whole life, universal life and variable universal life. These three divisions have subdivisions within them.
With the traditional whole life policy, the benefit after death and the premium remains the same throughout the course of the policy. As the age of the insured increases, the risk too grows correspondingly. Thus the insurance company is forced to charge a higher premium for the older people but that would make it unattractive and unaffordable for most of the people.
Thus the insurance companies keep the premium level steady throughout the period by relatively overcharging the younger people than that would be needed to pay the claims and subsidizing the premiums for the elderly. But the law stipulates that when the “excess payments” reach a threshold, it shall be made available to the policy holder if he / she decides not to continue with the original plan. Thus, the excess cash collected under this plan is an alternative source of money flow and not an additional benefit.
Types of permanent insurance
Ordinary or whole life
In this type of insurance, the life insured agrees to pay a particular amount of premium on a regular basis for a certain amount of death benefit and it is the most popular policy available in its kind. There is a provision for death benefit coupled with a savings account available with this policy. There is an opportunity to get a higher return based on the dividends declared by the insurance company from time to time.
Adjustable or universal life
Compared to the whole or ordinary life insurance, this policy has the advantage in being flexible and you have the option of increasing the death benefit provided you pass the medical examination. The cash value account from this policy entails a rate of interest equivalent to the money market. After a period of time, when sufficient money has accumulated in your account to cover the costs, you have the option to reduce the premium paid. This comes handy when the life insured faces sudden economic crisis.
But there is danger when you reduce or stop paying the premiums because the money thus accumulated is likely to be depleted after some time and you run the risk of lapse of policy and insurance coverage becomes null and void. Hence, it is advisable to plan the payment of premium in consultation with an agent and plan accordingly.
This policy comes with death protection and savings account with an option to invest the money accumulated in stocks, money market mutual funds, bonds etc. There is a huge benefit for the optimists who thinks that there are chances of money growing faster but looking at from other point, there is a downside too because investing in stocks has its own merits and demerits. The silver lining with some policies is that there is a guarantee for the return not to fall below a certain value.
Variable universal life insurance
This policy has the twin advantages of both the variable and universal policies. You have the investment risks and benefits that is typical for the variable life insurance policy as well as the option to alter your premium and death benefit depending on the need, which is characteristic of universal life insurance.