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Know Your Life Insurance Types

Updated: May 11, 2023

Life Insurance can be tricky - here's a quick primer to help you navagate


Life insurance is a contract between the policyholder and the insurance company, where the policyholder pays a premium in exchange for a death benefit to be paid out to their beneficiaries upon their death. There are several types of life insurance policies available, each with its own unique features and benefits. The most common types of life insurance are:


1. Term life insurance: Term life insurance provides coverage for a specified period, typically 10, 20, or 30 years. It is the most affordable type of life insurance and provides a death benefit if the policyholder dies during the term. If the policyholder outlives the term, the coverage expires, and there is no payout. Term life insurance is popular for young families who need to protect their loved ones if they pass away prematurely.


2. Whole life insurance: Whole life insurance provides lifetime coverage, and the premiums are typically higher than term life insurance. In addition to the death benefit, whole life insurance also has a savings component known as cash value, which grows over time. The policyholder can borrow against the cash value or withdraw it if they surrender the policy. Whole life insurance is often used as an estate planning tool or for individuals who want a guaranteed death benefit and a savings component.


3. Universal life insurance: Universal life insurance is similar to whole life insurance but offers more flexibility in premiums and death benefit amounts. The policyholder can adjust their premiums and death benefit to meet their changing needs. The cash value of the policy earns interest based on a minimum guaranteed rate set by the insurance company. Universal life insurance is popular for individuals who want the flexibility to adjust their coverage and premiums as their needs change.


4. Variable life insurance: Variable life insurance is a type of permanent life insurance that allows the policyholder to invest the cash value of the policy in various investment options, such as mutual funds or stocks. The policyholder can choose the investments and can potentially earn higher returns than with other types of life insurance. However, the cash value is not guaranteed, and the policyholder bears the investment risk.


5. Indexed universal life insurance: Indexed universal life insurance is a type of permanent life insurance that allows the policyholder to earn interest based on the performance of a stock market index, such as the S&P 500. The policyholder can adjust their premiums and death benefit, and the cash value grows tax-deferred. Indexed universal life insurance is popular for individuals who want the potential for higher returns than traditional universal life insurance but still want some downside protection.


Overall, each type of life insurance has its own unique features and benefits, and the best type of policy for an individual depends on their specific needs and circumstances. It's important to consider factors such as age, health, financial goals, and budget when choosing a life insurance policy.

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