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The Basics of Whole Life Insurance, Term Life Insurance and Universal Life Insurance
Author David Schneider | Aug 29,2007
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Life insurance. We all know it leads to the difficult subject of payout upon death. Still, the peace of mind that comes from having a policy makes the discussion a necessary one. When choosing a policy, you'll hear these terms: Whole Life Insurance, Term Life Insurance and Universal Life Insurance. Read on to learn about the basics of all three.
Term Life Insurance
Term Life Insurance is the easiest to explain: You pay a company a premium to cover you for a set amount of time, and if you die within that time the company pays money to your beneficiary. The terms and benefits can vary, so we'll use the example of one year, starting on the first of November. If you've paid the company for that term, but die before the year is out, the company pays your beneficiary. If you die one day after the policy has lapsed, they receive nothing.
Term Life Insurance is the least expensive type of insurance to buy, because the odds of you dying within that year are very small. However, let's say you contract a terminal illness during that one year, and die after the coverage has lapsed. In this instance, no benefits are paid. Furthermore, having that illness is likely to make you uninsurable. If you have an incurable disease it is nearly impossible to secure insurance.
Term Life Insurance is inexpensive and provides high rewards. It's used by many young people who have large financial liabilities. For example a head of household might take it up so that in the rare case they pass on, their mortgage can be paid off and their kids will have funding to go to college.
Whole Life Insurance
Whole Life Insurance is more expensive than Term Life Insurance, because unlike term, it's guaranteed to pay a benefit sometime in the life of the insured as long as payments and conditions are met. The biggest advantage of Whole Life Insurance over Term Life Insurance is that it cannot be revoked in the case of the insured suffering a terminal illness.
Companies provide many ways to pay Whole Life Insurance, from monthly payments over the span of decades, to one-time lump sums. The premiums and coverage can usually be adjusted so that a younger person with high financial liability can set higher coverage at greater cost, and then reduce both as they grow older and their family is more secure.
Universal Life Insurance
Universal Life Insurance is very similar to Whole Life Insurance in that it covers the insured for the duration of the policy, regardless of health conditions. It differs in that it serves as more of an investment opportunity. The policy is setup so that cash value above the premium cost paid by the insured is credited to the value of the insurance. The insurer then credits the interest on this cash value each month. In the case that no premium is paid, the insurer can draw it from the excess cash value. This serves as a safe investment, and it can be a good means of insuring an individual who has a variable income.
Life Insurance Basics Summary
These are the basics on the three main types of life insurance policies. However, there are different versions of these policies. For example, one type of Whole Life Insurance is the 'limited pay' option that 'pays off' the life insurance after a set number of years. And there's a type of Universal Life Insurance that uses investment in mutual funds instead of interest to increase cash value. But once you've determined which of the three basic types is for you, your insurance company should be able to give you the finer details of their programs. |
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