Life insurance is an agreement between an insurer and an insured individual, in which the insurer agrees to pay out a fixed amount of money to a specified beneficiary a predetermined amount of time after the insured person’s death, usually on an agreed term. In return, the beneficiary is obligated to pay out a regular amount of premiums. Depending on the terms of the contract, death of the insured person may also cause immediate payment. While the above is not really a thorough explanation of how life insurance works, you should be aware that life insurance benefits are generally a fixed sum of money paid out to the beneficiary at specific intervals.
Life insurance also incorporates investments, as does its cousin, universal life insurance. In both cases, the term may be specified for a fixed period in the case of life insurance, but investments within the policy itself can be a bit more flexible. This is because the policy will make payments to the invested funds, cumulatively. The resulting value of the portfolio is then used as the cash value, or face value, of the insurance coverage.
As with any other type of policy, life insurance policies also come in two basic types. There are “permanent” and “temporary” policies. Both of these types come with their own set of features and benefits. To explain the difference between the two, let’s take a look at the more common permanent policies first.
Permanent policies are designed to provide cover for a specified period of time. For instance, if a family is expecting an infant shortly before the birth, they may opt for a whole life insurance policy. The policyholder will be paid the lump sum amount upon the infant’s birth, regardless of when the child actually comes into the family’s life. Whole life insurance policies can last a lifetime, though they may cost significantly more than temporary ones. Temporary policies work similarly, but instead of paying out upon the successful birth of the infant, they pay out upon the first death of the insured adult.
After the first death, the family is then able to choose whether or not to renew the policy, with options to convert the plan into a variable life insurance plan, or to discontinue coverage. The adult children are then able to choose whether or not they want to convert the policy into a permanent plan. If they decide not to pass away during the initial term, they will be able to use the money that they have accumulated under the plan until they reach the age of one hundred. If they die during that period of time, they will receive the full benefit.
Another option families have when it comes to life insurance plans is flexibility in premium payments. Usually, when a family takes out a policy they will select a premium payment that stays the same throughout the life of the policy. However, some companies are now offering flexible premium payments that will adjust upward based on increases in the inflation rate. In order to keep the cash value of their plan from diminishing too quickly, people can make constant premium payments throughout their lives. These constant premium payments allow their loved ones to not only maintain the cash value of the plan, but also build it up over time as if the individual were still alive.