Life Insurance Typese
A life insurance contract is a serious bit of business. It is a kind of financial protection that an earning member of the family buys so that in case of that person's death, his/her family will not be financially in any trouble. Some people also use a life insurance to reduce their tax burden as some types of insurance premiums are non-taxable.
What is Insurance?
To put it quite simply and bluntly, a life insurance agreement ensures that on the death of the insured, his/her nominees will receive a financial lump sum. For availing this facility, the insured has to pay a certain amount of money as premium periodically to the life insurance company. A life insurance agreement is therefore a contract between two parties - the insurer and the insured, where the insured pays regular insurance premiums and the insurer, in case of the death of the insured, provides financial compensation to the nominees of the insured. An insurance contract also contains various details regarding the duration of the insurance, the premium to be paid, etc. One of the most important factors that an insurance agreement covers is that all reasons for death are covered by the insurance agreement. Insurance agreements differ based on whether they include accidental death, murder, suicide, etc.
Life Insurance Types
The types of life insurance can be grouped into two broad categories:
Term Life Insurance
A term insurance is a life insurance policy for a relatively shorter period of time. The terms and conditions of this type of life insurance policies are that the insurance amount will be paid only on the death of the insured. In case the insured does not die during the term of the insurance, the insurance amount does not get carried over. Thus there is no penalty as such for not renewing a term insurance and the renewal is completely at the discretion of the insured. Insurance premiums of term insurance increase with the age of the insured as the chances of his illness and death also increase. A term policy is generally tax free.
Permanent Life Insurance
A permanent life insurance is what the name suggests: a life insurance cover that lasts for as long as you live. What a permanent life insurance policy does is that, along with insurance, it also provides a savings element which builds a cash value. The premiums of a whole life insurance for most insurance providers remain the same and are understandably higher than term life insurance premiums. A whole life policy lapses if the insured defaults on a payment and does not reinstate it. There are various sub types of permanent life insurance, namely whole life, universal life and variable life insurance:
- Whole Life Insurance: A whole life insurance is one of the most basic forms of a permanent life insurance. Like most permanent life insurance plans, the premium consists of a factor for actual insurance premium and one that goes towards a cash savings account. Interest gets accrued on these savings. In case of the death of the insured, the nominee gets both the accumulated savings as well as the insurance amount.
- Universal Life Insurance: Universal Life policy is almost exactly like the whole life insurance policy. The only differences are that in a universal life policy, the insured is allowed some flexibility to modify insurance premium and the savings component.
- Variable Life Insurance: The only difference between a variable life insurance and other forms of permanent life insurances is that variable life insurance holders are allowed to pick where the money saved is to be invested. They have the flexibility to invest their savings in a higher growth investment plan.
