Are you getting confused while looking for life insurance because of the many available options? If you are new to this insurance, you may not even know where to start because there is a lot of information. However, there are apparent differences in the major types of life insurance, and you need to know them.
Several factors determine the kind of insurance to take, depending on your situation. First, you need to determine how long the policy should last and how much you can pay for it. You may also decide whether you want to use it as an investment vehicle because some types provide that option.
In this article, you will learn about the various categories of life insurance and how to choose the one that suits you. Read on.
Major Types of Life Insurance
When you contact an insurance agent for an insurance cover, they will introduce you to four major types of policies. They include the following:
- Term life insurance
- Whole life insurance
- Universal life insurance
- Variable universal life insurance
Under these categories, you will find many other life insurance options. They are subdivided to ensure that everyone gets a package that addresses their needs. However, the vast majority of the variations you will find fall under one of these four classes of life insurance.
Term Life Insurance
Term life insurance has a set term during which it will be in force. Usually, a person determines how many years they want to insure their life and commit to paying for that period. It is the cheapest option in this industry, especially when you want to pay yearly premiums.
If you choose this option, you should know that you will not enjoy life insurance benefits if you outlive the period you set when you took the policy. However, your beneficiaries will get full benefits if you die within that period. That is why you have to be careful with the limit that you set.
If you are thinking about investment, this insurance has no benefit for you. There is no cash value, and when the duration expires, you walk away with nothing. That is why life insurance companies often expect their customers to outlive the term coverage.
Whole Life Insurance
Under whole life insurance, you are supposed to get a permanent cover that will last an entire lifetime. It uses a level premium structure, while the premiums remain the same every year. The biggest advantage of this insurance is that it builds cash value, and therefore it can be used as an investment.
People who buy whole-life insurance are entitled to receiving dividends from the insurance company based on their cash value. As long as payments are made on time, the cash value will keep growing, and dividend payments will increase. In addition to that, the performance of the company determines how much dividends customers receive.
As long as the customer complies with the insurance policy requirements, there will come a time when the cash value grows so much that it pays for premiums. When that time comes, the customer will be withdrawing from the company instead of paying premiums. That is one of the reasons this cover is attractive to many people.
Universal Life Insurance
Although universal life insurance is as permanent as whole life insurance, they are different because the former has a flexible premium payment structure. The insured party is required to have a cash-value account from which insurance premiums are pulled every month. If there is any excess payment to the insurance policy, the balance is paid into the cash-value account.
The cash value grows as time goes by, and several factors determine this. For example, it will grow faster when the company performs well and slows down when the company is struggling. Prevailing interest rates determine the growth, too, and the minimum amount is 2% per year.
You need to know that the cost of a universal life insurance policy grows with time, and therefore, you may want to fund your cover in its early stages. However, the growth in cash value may be enough to take care of the rising charges. This insurance is not salable as an investment, but you can surrender it for its cash value.
Variable Universal Life Insurance
A variable universal life insurance cover is similar to the universal life cover, only that its cash value account does not pay a guaranteed rate. Instead of that, they invest the cash value in other variable sub-accounts that are part of the policy. For example, they may be mutual funds, which are investments in various assets and other opportunities.
With this policy, the cash value growth depends on the performance of the sub-accounts, and it can sometimes result in a loss. The biggest advantage of this policy is that the stock markets always outperform universal accounts, and so, growth is almost certain. However, should the markets shrink, the policyholder will shoulder the losses.
You can take loans or withdraw from your cash value account when you have this policy, and you can also surrender it for its cash value. The insurance company determines the charges of surrendering or withdrawing from the account. Being a permanent insurance policy means that the cost of insurance will rise over time.
Choosing the Right Life Insurance Policy
If you look at some of the tips for selling life insurance, you will notice that every type is meant for specific people. Choosing what suits you is what guarantees the best experiences. Always understand the options available to you.
When you have to choose between these four classes of life insurance, you need to assess your needs. Determine whether you want a limited or permanent insurance policy. You should think about investment and whether it can add some value to your life.
Get Life Insurance from a Trusted Company
After knowing the difference between various types of life insurance, you need to get a policy from a company you can trust. Look for insurance agents who provide accurate information and ask for recommendations. You should also know the premiums you will be paying every year or month before signing up for the insurance cover.
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