Life insurance, in the beginning, was available at a very basic level.
An individual would pay an insurance company a certain amount of money over a certain amount of time.
If the insurer died during the term, the insurance company would make a lump sum payment to a beneficiary.
Today, life insurance policies cover a wider range of functions and can usually be personalized to fit individual needs.
There are two types of life insurance policies; term and permanent.
Term life insurance is the basic life insurance, used by individuals that need life insurance for its original use; to cover those whom depend on you for financial support in the event of your death.
Terms can run for 1, 5, 10, 20, or 30 years.
To make it more flexible, companies now offer renewable term life insurance. These policies guarantee the insurer the ability to renew the term of the policy.
Generally, the premiums go up as the policy gets older.
Permanent life insurance policies run for a lifetime, and come in several formats.
Whole life insurance allows the insurer to generate cash value through payments that are greater than the normal premium amount.
The extra funds build in an interest bearing account and are added to the death benefit.
Loans to the insurer could be made from the cash reserve in the account.
Universal life insurance policies offer more flexibility than a whole life policy by giving the insurer the ability to change the premium amount paid based on changing financial situations.
So long as the minimum insurance coverage fees were paid, the policy would remain in effect.
In older policies, the interest earned through the cash reserves would cover these fees, giving the insurer no out of pocket expenses.
In a variable universal life insurance policy, the cash reserves in the account could be moved into other investment vessels, such as mutual funds, stocks, and bonds.
The insurer would take on the risks such investments imposed.
The biggest difference between term and permanent life insurance policies is the cost of the premiums.
The possibility an insurance company may never have to pay out a death benefit before a term policy expires allows them to charge much lower premiums, sometimes as much as a tenth of the cost of the permanent policies.
However, the money saved in a term policy and invested elsewhere, might not due as well as the money in the cash reserves of a permanent policy.
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