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Types of Life Insurance Policies

Most people don’t enjoy thinking about their own mortality and let’s face it that is exactly what you are doing when you are considering buying a life insurance policy. If you are here though, reading this article, doing the research, it is because you understand that this purchase is not about you or your feelings, it is about the people you love. You want to protect and provide for them even after you are gone. While not “sexy”, there is no gift that can possibly compare. The following discussion is intended to provide you the information to decide whether you need a policy at this point in your life and if so, to help you decide on the policy that best fits your needs.

Life insurance is a fairly straightforward concept, but there are nuances that a first time buyer should understand. The two major classifications of life insurance policies are term life insurance and whole-life insurance. Term policies last for a specific amount of time, usually stated in a number of years. The policyholder is covered during the term; exchanging a set amount of premium payments for the guarantee of a beneficiary payment in the event of the policyholder’s passing. The term of this type of policy may range from one year to more than thirty.

A whole-life insurance policy spans the policyholder’s entire life, meaning that payment to a beneficiary is guaranteed. This difference: the possibility of payment under a term policy versus the guarantee of payment under a whole-life policy creates a very different financial instrument and means that the whole-life policy costs significantly more than a similar term policy. Historically, many whole-life insurance policyholders have used whole-life policies as investment vehicles. While there are some benefits to this strategy (for instance some states exclude the value of these policies from bankruptcy proceedings), in general, whole-life policies are not good investments. For most people, a term policy better fits their needs. For individuals who want to guarantee funds will exist after the term, the difference in cost between a whole-life and term policy can be invested separately in a much more efficient manner.

Another alternative for an individual who is looking at life insurance as an investment is to choose a variable life insurance plan. In this form of coverage, the money that has been paid in premiums can be placed in a number of different investment vehicles provided by the insurance company. With a smart investing strategy, the insured person can earn interest on the paid premiums and leave a larger sum to the beneficiary. However, it is important to note that the policyholder retains the risks associated with the investment options.  Additionally, the investment options are often rather limited and the insurance company may charge a fee (perhaps embedded in the premium) for this service. While term insurance policies fit the needs of most individuals, variable options have improved over time and may be worth consideration.

A potential life insurance customer should know that the policies offered and the premiums that are paid are computed according to very precise actuarial tables. Personal characteristics (including age, health, race and gender) are taken into account to determine a reasonable estimate for the age expectancy of the individual applicant, which in turn determines the cost of the policy. Of course the respective insurance company adds a profit margin to the premium and each insurance company calculates the cost of the policy differently. Insurance companies attempt to balance the overall risk profile of the population they insure and may offer attractive pricing to individuals who help them balance that risk profile. Therefore it is not only important to decide on the right term or type of policy, but it is important to compare prices among insurance providers to find the company that offers the best rates.


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