Can you explain the different types of life insurance?
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Asked October 19, 2010
Term life insurance is the least expensive type of life insurance, but it does not have the flexibility you can get with other life insurance policies. When you take out a term life insurance policy, it is effective for a given period of time, such as 20 years, and must be renewed or forfeited after that time, called term, has expired. Term life policies are often used to make sure a specific purpose is accomplished, such as paying off the home mortgage when you die.
Whole life insurance is also called permanent insurance, and does not expire the way a term policy does. Most types of whole life insurance allow the policyholder to borrow against money paid into the policy, decide how the premiums paid will be invested, or take other participatory actions regarding the account. In many ways, a whole life insurance policy can be thought of as a type of tax deferred savings account. A whole life insurance policy has a cash value that is at least equal to the money you have invested in the policy, less administrative costs.
Variable whole life insurance is similar to a whole life insurance policy, except that there is no guaranteed cash value if the policy is terminated while the insured still lives. The value of this type of policy is closely tied to the market funds it is invested in, and may be more than you expect or dramatically less.
A universal life insurance policy is similar to a Whole Life policy, with the exception of less policyholder participation in how the premiums are invested in money market funds. It still allows the policy to act as a tax-deferred savings account, and can be borrowed against the same as Whole Life.
A Variable Universal Life insurance policy is similar to a Universal Life insurance policy in how it works. The major difference for this type of policy is that the value of the policy is not set from the beginning, but increases over time as you invest more money into it through your premium payments.
Answered October 19, 2010 by Anonymous