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Whole Life, Universal Life, Variable Universal Life, or Term - Insurance 101
If you've been shopping for life insurance you probably have run across the terms whole life insurance, universal life insurance, variable universal life insurance, as well as term life insurance. Do you know the difference between these types of insurance? In order for you to make the best choice why don't we take a look at the basics?
Life insurance can fall into one of two broad categories. It's either permanent or term. The concept of buying life insurance revolves around the idea that if you die prematurely there will be a cache of money available that will take care of the financial needs of the loved ones you've left behind. This money reserve is called the "death benefit".
The premium you pay for your insurance - your monthly payments - are determined by your health, your gender and your age. These three factors are analyzed to determine the risk the insurance company takes when they insure your life. That's the reason older people in poor health pay considerably more for their insurance than young people in great health.
Every year you enjoy above the ground inevitably means that you're that much closer to death. Because of that the raw cost of your insurance will increase yearly.
Term Life Insurance
Term insurance with a level plan spreads out the increasing cost over the term of the policy. The term is usually for either 10 years, 20 years, or 30 years. If you decide to renew your policy when the initial term end has ended you will pay a higher premium because you are that much older.
Permanent Life Insurance
Your premium will stay the same for a permanent life insurance policy for as long as you own the insurance - up to age 100. The math behind what you pay in premiums for permanent life insurance is that you will pay more than the raw cost of insurance when you're younger. Whatever excess money there is will be put into a reserve.
Then, when the raw cost of your insurance is more than your premium, the difference will be withdrawn from that reserve. This way you should never be in the situation where your monthly cost of insurance will become too expensive.
Whole Life, Universal Life, Variable Universal Life - the Differences
The primary difference between whole life insurance, universal life insurance, and variable universal life insurance has to do with what return you will earn on the money that's in your reserve. While universal as well as whole life focuses on interest, a variable universal life policy permits you to invest your reserve in accounts that function similarly to mutual funds.
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