Types of Life Insurance
Building wealth is an activity which everyone is keen on partaking in. But in order to build wealth, it is important to have a personal discipline, having an understanding of current events so you have an idea of what to do and finally, it is important to have the right type of life insurance. There are two types of life insurance, term and single premium. Term insurance is “renting” life insurance coverage. The insurance coverage is calculated based on a person’s mortality rate and the calculations made by the actuaries of the insurance company and therefore, provides a rough estimate of the sum of money a person’s heirs will receive. Generally speaking, as a person lives through each year they are closer to death. Because of this the premium on the insurance would increase every year. So instead of having to pay more and more sums of money to insurance companies each year, the companies offer something known as “level term policies” and the insurance premium is guaranteed not to rise over a specified period of time, although you would have to pay a little bit more than usual in the first year. For example, an insurance company would offer you a steady premium payment of over 10-30 years. But the problem arises when the level term policy reaches its end and the premium rises again in price.
There are also types of insurance based off of term insurance. One of these is Universal Life Insurance. Universal Life Insurance is basically a one-year term life insurance with an addition of a cash fund pool. So this means you can pay how much premium for your life insurance plus an extra premium you can pay which goes into your cash fund. The cash fund has a rate of interest and usually insurance companies would offer a minimum guaranteed interest rate (because the ROI could fluctuate each year). The benefit of this is that upon your death, your heirs will receive both the cash value from the cash fund pool and the death benefit of the existing life insurance policy. The second type is variable life insurance. Variable Life Insurance offers the same, a one-year term life insurance plus the cash fund pool. But the difference lies in the cash funds, which allows the policy owner to invest their cash funds in other markets such as stocks and mutual funds. Policy owners do so when they want a higher return in their cash funds, but stocks and mutual funds can also incur major losses. The third type is Equity-Indexed Universal Life Insurance. This is exactly the same as Variable Life Insurance, except the cash funds are invested in the index of stocks. Insurance companies usually offer minimum interests rate, but also cap the profit margin you can earn.
Single Premium insurance is a type of insurance where you can pay a huge lump sum of money to the insurance company, getting all the benefits that the policy promises and guarantees a status of being fully paid up for your entire life. The premium paid for this is much higher than term insurance or universal life insurance, but a large percentage of the premium appear as cash values as each year progresses. This method of insurances helps to reduce the risk policy for the insurance company as the death benefit and cash value become equal progressively. This is a better policy compared to universal life insurance as it is possible to have a fluctuating cash flow in the cash funds pool, whereas the cash flow in a Single Premium is constant.
Both these types of life insurance are in extreme ends of each other, so insurance companies also offer a third type of insurance policy known as Ordinary Life. Ordinary Life consists of many features of Term Insurance and some benefits of Single Premium. You can pay an annual fund (which is consistent instead of higher every year) for the insurance but it will also cover you for life all at once and it can easily promise a return on cash value as well as the death benefits.