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Life Insurance Explained: Types and Coverage

(5/15/2012) Life insurance is a method to protect your family and loved ones in the case of your passing. It's a critical investment to make, so it's equally critical to understand the different choices you have.

Generally, there are two types of life insurance - term life, and cash value policies. While other types exist, industry experts usually advise caution in buying them. Sticking to these types listed here, and relying on a few key purchasing guidelines, will ensure you receive appropriate coverage for your needs and financial situation.

This type of insurance is generally considered the simplest and least expensive life insurance choice. Purchased for a specified time period, this policy pays a specific sum to your designated beneficiaries upon your death, helping protect against any financial loss. The policy pays out the face value - a $200,000 policy, for example, pays $200,000. These policies are good in cases where a limited time is needed for coverage, and when funds available are limited.

Term life insurance provides a cash payout, called a “death benefit.” Other types of insurance, often referred to as “cash value policies,” provide this benefit along with a type of savings account the policyholders contribute to. Premiums are usually larger than term life insurance as they fund the policy and the savings account. Cash value policies include whole life, universal life, and variable life insurance.

This type of insurance is very basic and fairly comprehensive. It provides guaranteed coverage for the entire life of the policyholder. Premiums are fixed throughout the life of the insured, and cover insurance costs and contributions a savings account. Your savings will usually be invested in fixed-income securities, meaning your funds will be subject to interest rate and inflation risk. You have the option to receive dividends from this investment, or apply them to reduce premium payments. You also have the option to withdraw or borrow against your policy during your lifetime.

With this policy, you can elect to pay additional money beyond your premium into the cash value account. Typically, your insurance company will invest this money in bonds and mortgages. You can then earn interest and returns on this account, using the funds against your premiums or adding to your account value. Depending on your choice, the cash account goes directly to your beneficiaries in addition to the death benefit upon your death. You also have the option to withdraw or borrow against your policy during your lifetime.

This type of life insurance offers policyholders more flexibility in the ways their cash value account is invested, in terms of securities, bonds, mortgages, or other vehicles. Returns from these investments can go towards premium costs or build the account. And depending on the policyholder's choice, beneficiaries receive the face value of the policy and all or part of the cash account.

For additional reading:

Money 101: Life Insurance

How to Buy a Life Insurance Policy




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