When it comes time for you to purchase a life insurance policy, you have the option of choosing from five different types of policies with each of them offering their own unique benefits.
These five basic types of life insurance policies are term life, whole life, universal life, endowment, and annuity.
The basic structure of the first four is to create a principle sum or estate through either the death of the insurer or through the buildup of funds set aside specifically for investment purposes.
Conversely, an annuity is used to liquidate a principle sum in a specific matter, regardless of how that sum was created.
Below is a brief summary of each type of life insurance policy:
One of the most commonly used policies is term life insurance and is often referred to as temporary insurance as it offers coverage for a specific period of time – typically 1, 5, 10, 15 and 20 years.
These policies can protect your beneficiaries against financial loss resulting from your death.It pays the face amount of the policy, but only provides protection for a specific duration of time that is listed in your policy. In addition, these policies do not build cash values and the maximum term period is usually 30 years.
Once the policy has expired, it is up to the insurer to renew the policy or to let the coverage end.
Unlike term life, whole life insurance provides for the payment of the policy’s face value whenever the insurer dies, regardless of when death occurs. In addition, these policies carry a “cash value” feature that grows tax-deferred at a contractually guaranteed amount until the policy is surrendered.
Universal life was introduced in 1979 as a revolutionary new product as it was the first variation of whole life insurance to offer truly flexible premiums. Contract to whole life insurance- the premiums, cash values and level amount of protection offered in universal life can be increased or decreased during the contract term as the insured’s needs may change.
An endowment is another variation of whole life insurance that provides a death benefit, and a cash value component that increases over time so that a policy’s cash value will equal its death benefit at maturity. In addition, an endowment allows the purchaser to specify the policy’s maturity date.
Note: Due to United States tax laws, this type of policy is extremely rare in the States but is still popular and viable in countries that have lower saving rates.
A financial product designed to accept and grow funds from an individual and when – upon annuitization – pay out a stream of payments to the individual at a later point in time. They are primarily used to secure a steady cash flow for an individual when they have retired.