There are four main types of Life Insurance available and choosing the right one can be a confusing task. You need to decide which type of cover best fits your needs.
Term Life - This is probably the most common form of Life Insurance, and is also the easiest to understand. You purchase a policy for a set period, and at a set premium. For example you may decide to purchase a ten year policy to cover yourself until your children finish college. If you die during the course of the policy, then your named beneficiary will receive the value of the policy as a lump sum. Once the policy has expired you will receive no payment of any kind, even if you die shortly afterwards. This policy carries no cash account unlike the rest of the policies we will look at.
The other types of Life Insurance policies all pay a benefit upon your death and also include a cash account. The premiums for these policies are always larger because of this. These policies sometimes allow you to withdraw money against the cash account, or take a loan from it. You should be very careful before doing this as it almost always results in a reduction of your policy benefit. The benefit is always paid to your named beneficiary upon your death.
Whole Life - This policy covers you for your whole life and is not for a specified time period. The premiums are normally fixed throughout for as long as you continue to pay the agreed amount. There is also the option to receive dividends from your policy as cash payments. Alternatively you can use these dividends to reduce future premium payments. These polices offer no flexibility to invest in separate funds, or to have separate accounts. There is also no option of changing your premium payments.
Universal Life -These policies have greater account flexibility than Whole Life, but carry more of a risk from an investment standpoint. It is possible to earn interest at market rates for the cash account. As the policyholder you can, depending on your policy agreement, choose to change your premium payments, miss payments or pay in a lump sum amount.
Variable Universal Life - These policies are the most flexible you can get and so carry the greatest investment risk. The final benefit can vary depending on how the cash account performs during the course of the policy. These policies allow you to invest in separate accounts, but the policyholder is responsible for managing the investments and thus the success of your accounts depends on your investment choices. Some of these policies carry a cash value penalty for terminating the contract early.
Different companies may implement these policies in slightly different ways, so it is always best to check with the individual companies first.
On a final note, always remember to consult a financial advisor before making any big decisions about life insurance. They specialize in this type of consultation and will ensure that you get a policy that best suits your circumstances.