There are many different types of life Insurance policies available. Term life insurance, whole life insurance, and universal life insurance are three main types of life insurance. When life insurance is purchased, payments are made. When the insured dies the beneficiary will get the money which can be paid as a lump sum, monthly payments, or an annuity. Most people choose to get it in a lump sum.
Term life insurance is typically the simplest and most affordable type of life insurance. Term life insurance lasts for a set number of years. If the insured dies before the term is up, it pays a set amount of money to the designated beneficiary. Coverage ends with the term is up so a new policy needs to be purchased or the existing policy needs to be converted before it expires.
Whole life insurance is different from term life insurance because it does not expire. It is permanent life insurance, as long as premiums are paid. It has a death benefit and it also builds cash value. Each month, a portion of the paid premium goes into the cash value so the more that is paid in each month, the faster the cash value grows. The cash can be used as a long-term savings account, and it can be borrowed against. Whole life insurance is more expensive than term, so the consumer often buys less insurance than they need because it is expensive.
Universal life insurance offers a flexible long term option, but the premiums are not fixed. The policy, and even the premiums, within limits, can be adjusted to accommodate life changes. However, if the policy is not adequately funded, it could end since it is not guaranteed. Premiums are paid on the full face value for the life of the policy regardless of how much cash value the policy has. The interest rate on a universal life insurance policy is influenced by current market interest rates so if the interest rate were to fall below the minimum rate, your premium would have to rise to make up for it. Additionally, the cost to keep the policy can go up as you get older.
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