Life insurance provides financial security to those people who depend on your earnings. There are many available forms of insurance, but they generally fall into two categories:
- Term Insurance
- Cash Value Insurance
With term life insurance, the beneficiaries receive their benefits only if the insured person dies within the period of time specified in the policy. While this kind of life insurance is usually the least expensive, the monthly premium may increase as the policyholder ages. The various kinds of term life insurance are:
- Yearly renewable term. Gives protection for one year and must be renewed every year. Premium increases annually.
- Level term. Gives protection for a contracted number of years. Premiums stay constant throughout the term.
- Decreasing term. Gives protection at a decreasing amount of insurance each year for a fixed premium.
- Convertible term. Allows shifting to a cash value policy.
Cash Value Insurance
Cash value offers protection as well as an investment option. Because you are paying for protection, savings, and the insurance company’s administrative fees, cash value insurance is more expensive than term insurance. The accumulated sum of the savings, identified as the cash value, is tax-deferred.
- Whole life insurance. Gives life-long protection and earns interest at a rate determined by the insurance company. The rate is usually low for the first few years. Most whole life policies have the flexibility for owners to borrow from the cash value. The premium remains constant after it is contracted according to age and health.
- Universal life insurance. Is commonly more flexible. Premiums can be added after the first premium is paid, thereby increasing the savings that also accumulate tax-deferred. The amount of coverage may be adjusted without the insured proving insurability. Borrowing is allowed. Interest is paid according to the money market rates.
- Variable life insurance. Permits the insured to decide how the savings are invested. A minimum death benefit and the money earned beyond face value are usually guaranteed. Savings accumulate tax-deferred. The cash values can decrease as the value of the chosen investment decrease. Borrowing is allowed.
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