Life insurance is essentially a contract between an insurer and an insurance holder or insurer, in which the insurer pledges to pay out a designated amount of money to an insured person upon the loss of an insured individual. Depending on the agreement, payment can be made for any number of events including critical illness or terminal illness. The insured individual may not die during the agreed period. This is called a cash value account and is used to replace a person’s death benefits in case of any eventuality. There are various types of policies available and most policies are designed to suit a particular need.
One of the most popular types of policies is the Level Term Life Insurance policy, also known as a whole life or universal life policy. In this type of policy, a set amount of money is paid from the insurance company’s base capital, which can be borrowed up to a specified amount in certain circumstances. The policyholder makes premiums payments for the named beneficiaries and they grow tax-deferred until they reach the age of one hundred years old. The policies become effective at the time of death for the named beneficiaries, but if these payments cannot be made, then the policy will lapse and no payment will be made. Whole life policies have variable premiums and depending on how long the insured has taken out the policy, the payments can either increase annually or every six months.
Another type of life insurance policy that many individuals choose to purchase is called a Term Life Insurance Policy. This is more commonly known as “Term Life” and can be purchased to cover burial expenses and legal fees after the insured has died. Some policies allow the policyholder to select a time period after death in which funds are available. As with whole life insurance policies, at the end of the selected time period, payment can be made directly to the designated beneficiary or placed in an escrow account.
The most popular option that is chosen to protect beneficiaries is the Single Premium Policy. A Single premium life insurance policy gives the insured the option of only making payment to the beneficiary if the insured dies during the agreed upon time period. If the insured lives past this time period, then all of the premium payments will go to the other named beneficiaries. If the insured passes away within the time period, the policyholder receives the proceeds of the Single Premium Policy without having to pay any extra money. There are a number of different options that are available in a Single premium policy and they include coverage for children, a fixed interest, an untouched property and/or additional death benefits.
Whole Life Insurance policies remain active even after the policyholder has passed away. Most policies give the insured the option of continuing coverage on their name or naming another family member as a beneficiary. Some Whole Life Insurance policies may also create a trust and leave some of the death benefit for the beneficiary of the policy, which is done in accordance with the terms of the plan itself. With these types of policies, it is important to carefully consider the face amount and the premiums paid and remember that these premiums will only grow with each renewal.
Deferred Term Insurance is a type of non-conforming investment strategy. This type of policy does not pay a death benefit until a specific time period called the “term” has elapsed. During this time, the insurance company pays the beneficiary only the interest on the loan it made at the time of the insured’s death. In order to determine the amount of this interest, the deferred interest rate is used. While deferred term insurance does offer a potential benefit to policyholders, the payments on these policies are typically very low and they can be difficult to justify as a financial plan.