Insurance

Life Insurance Policy Definitions

A life insurance policy typically provides a monetary benefit when the holder of that policy dies. There are many types of life insurance, including: term life, whole life, variable life, universal life, and universal variable life.

Life insurance

Term life insurance is a policy that pays a specified lump sum in the event that you – the policyholder – die. Also, payment only occurs if the insured dies within a certain period of time. There are different types of term life insurance with different specific periods of time before the policy expires.

Whole Life Insurance

Whole life insurance is a policy that covers the entire life of the insured, as long as the premiums are paid. The policy expires when the insured dies. With this type of policy, the premium money is apply primarily to two areas: the insurance portion and the investment portion of the policy that consists of stocks, bonds, and mutual funds.

Variable Life Insurance

Variable life insurance is a form of whole life insurance that allows you to borrow from your policy during your lifetime. This policy’s death benefit and cash value fluctuate according to your investment performance. Variable life insurance also generally guarantees that the death benefit will not fall below a certain level.

Universal Life Insurance

Universal life insurance is a variation of whole life insurance, which also allows you to borrow from your policy during your lifetime. According to lifeinsure.com, universal life insurance carries an interest rate and comes with a projected premium. “If the insurance companies’ projections on your universal life policy don’t come through, then you may have to hit higher premiums later, have lower-than-expected cash values ​​or even lose the policy.”

Variable Universal Life Insurance

Variable universal life insurance is a form of whole life insurance that buys you a policy while investing in money market funds, stocks and bonds. CNN’s Money Magazine Editor Walter Updegrave says you can borrow policy money in the form of a low-interest-rate, tax-avoidance loan. However, he notes in a 2006 article on money.cnn.com, “Once you start borrowing against the policy, you have to keep paying premiums to keep the policy in force. If you let it lapse, you could be in horrendous tax nightmare.”

Misconceptions about life insurance

When talking about life insurance, many people think of a financial payment that is given to a beneficiary or beneficiaries after the death of the insured.

While this is true, the reality is that there are often conditions that reduce the amount paid to beneficiaries, especially with some types of cash value life policies.

In this type of policy, a single payment is made after the death of the insured, regardless of what the cash value account is worth at that time.

For example, if a person owns a whole life policy with a $100,000 death benefit and a $25,000 cash value account, the beneficiaries would expect to receive a payment of $125,000.

But this does not always happen. In this example, the beneficiary will typically only receive a total of $100,000. Because the cash value account is worth $25,000, the insurance company will only pay $75,000 in death benefits and another $25,000 from the cash value account.

With some products, however, beneficiaries are entitle to receive death benefits in addition to cash value accounts when their love one dies.

However, usually only an amount equal to the face value of the policy is pay upon the insured’s death. For this reason it is important to know this information before purchasing cash value insurance.

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