Insurance helps you protect yourself, your family, or any other important asset such as a vehicle or your house. Hence it is highly recommended that you should get one for yourself. If you have been looking out for policies, then you might have come across the term “life insurance”. It is primarily to safeguard your family in case of your sudden demise. In this article, we shall discuss in detail life insurance and its types.
what is life insurance?
It is a contract between the policyholder and the insurance provider, the latter agrees to reimburse the former for a certain sum if the former passes away. In return, the policyholder needs to pay a premium. Premium refers to an amount that you need to pay either monthly or one-time payment to secure insurance from the company.
This simply means if you take life insurance, you are obligated to pay a premium. In return, on your demise, your family members will receive a sum of money. You can even add names of people apart from your family in the beneficiary. The sum of money which is delivered by the company is predetermined.
Types of Life Insurance
Mainly life insurance is divided into two categories. The first one is permanent life insurance and the second one is term insurance. Mainly both serve the same purpose. Although the way they work is different. Let’s look closely at how they differ from one another.
Permanent insurance
- As the name suggests it is the policy that remains valid until a person is alive with the obligation of the policyholder to pay the premium as per schedule. Although if the policyholder wishes to terminate the contract then, he has the option to do so.
- Under this category, you can opt for cash-value life insurance. Simply in this scheme a certain amount of cash is accumulated through the lifetime and the policyholder has the freedom to use this money for multiple purposes such as using it as a loan or paying policy premium.
- If you are looking to earn some money then you can opt for Universal life insurance [UL] which has a cash value component on which you earn interest. In this, the premium is quite flexible and can be adjusted or modified later based on your needs. Also, another variation of this is Indexed universal life insurance in which you earn a fixed or equity-indexed rate of return on the cash value component.
- Variable universal life insurance [VUL] is similar to the above-mentioned policy with the difference being that it allows you to invest in a separate account. Something similar to how you would invest in mutual funds.
Term insurance
- Unlike life insurance, term insurance is there for a fixed period. It can be for 10 years, 20 years, or even 40. On completing the term you can choose to renew the term. In terms of function, it also aims to protect your family in case you the death of the policyholder. In this, you can choose to opt for decreasing Term in which your coverage value decreases with time or you can opt for a convertible term in which your term insurance gets converted to permanent life insurance.
Key differences between life and term insurance.
- The premium for Life insurance is much higher than the term.
- In life insurance you get your money back at the end of the policy while in term policy you pay the premium for the term duration and if not claimed you don’t get anything back.
- Life insurance gives you more flexibility and even provides loan benefits. Meanwhile you don’t get any of these benefits with the latter.
Confused with choosing the right type of life insurance for your family? Read this article to understand its different types so you can pick the right one for yourself.