Life Insurance Overview
A life insurance policy provides a cash payment when a person dies. This payment is known as the death benefit. Many people buy life insurance to protect the people who are dependent on them. Others buy life insurance as a way to leave a cash gift to their spouse, children, grandchildren and charities at their death. If you have made the decision to buy a policy, you may wonder which type of policy to choose since there are several different types of policies.
The Policy is written on the life of a person, known as the insured. The owner makes payments, known as Premiums, to the insurance company for the policy. In return, the insurance company agrees to pay the death benefit to the beneficiary if the insured dies within the Stated term.
Term
Term insurance is the most basic type of life insurance. The policy is written for the term of the policy, usually from the one to 30 years. If the insured dies within the stated term, the insurance company pays the death benefit to the beneficiary. When the term ends, the insurance ends. The premiums for term insurance are usually the lowest among the different types of life insurance, but will increase with the age of the insured. There is no cash value in a term life policy. This means there is no money for loans or to pay for the insurance if you can not pay the premiums.
Many employers offer a type of term insurance known as "group" term to their workers. Group policies cost less, and many companies pay the premiums. Generally, the policy is only good for as long as the worker stays with the company. Term insurance is suggested for those who only need the death benefit for a certain period of time.
Whole-Life
A whole-life policy pays a death benefit no matter when the insured dies. In most cases, the policy will guarantee the death benefit. The premiums are usually much higher than a term policy and the full premium must be paid each year. Whole-life policies have cash value. The difference between the premium and the actual cost of the insurance is put into a special account, known as the cash-value account. This cash-value account may be used to help the insured pay the "fixed" premium payments in later years. The policy owner may borrow against the cash value or receive the cash value if the policy is canceled. There may be charges associated with borrowing against the cash value or canceling the policy before the death of the insured. The insurance company may charge interest if the policy is canceled. At death, the beneficiary only receives the death benefit, not the death benefit and the cash value.