A life insurance policy covers the beneficiaries of the policyholder in the event of death. The insurable interest is the life of the insured. When death occurs, the beneficiaries of the policyholder are compensated for the resulting financial loss. The death benefit caters for expenses such as mortgages, children education, and funeral expenses. The three main features of a life insurance policy are the death benefit and premiums. Premiums are the regular contributions by the policyholder for the insurable interest while the death benefit is the compensation paid by the insurance company.
Term Life Insurance
This is the most basic and cheapest insurance policy. Term Life Insurance policy covers the insured over a specific period and has no cash value. When the term of the cover expires, the beneficiaries will not get any death benefit. The cover is limited, and the premium is set based on the risk factors involved. Risks determinants include age, the health of the insured and their medical history. Compared to other policies, Term Life Insurance is cheaper. Further, it is convertible to other forms of life insurance such as Whole life insurance.
Declining Balance Term Insurance
The main feature of this policy is the decreasing face value over the term of the plan. The premium paid, however, is a constant amount. Similar to the term life insurance, this policy is cheaper. The face value can be amortized annually or monthly and can as well be renewed by the holder to the original terms. The logic behind this kind of policy is the reducing financial risks over the life of the insured.
Whole life
Whole life insurance is a permanent cover. This means that
it covers the insurable interests of the holder over his or her life. Apart
from the death benefit, it also has a cash
value. One can borrow against the accumulated cash portion of the policy and also receives a dividend. Because of the
high risks involved, Whole Life Insurance policy is more expensive compared to the rest.
Universal life
Universal Life insurance policy is another permanent life insurance coverage. It has both a death benefit and a savings component. The interest earned from the savings part of it can be used in paying the premiums. This makes it cheap in the long-run.
Variable life
This form of life insurance coverage provides a death benefit
as well as an investment component to the holder. It is a permanent
policy and part of the premiums are
invested in securities such as bonds or stocks. The investment is limited only to the securities in the
portfolio of the insurance company. It requires a professional financial advisor and a prospectus when
subscribing to it
Universal Variable Life
Similar to the Variable Life insurance, the Universal Variable Life has both a death benefit and an investment part of it. However, the difference is that the interest rate from the investment fluctuates depending on its performance.
The amount of premium in any life insurance policy depends on the risks involved. High risks based on determinants such as age and medical history attract higher premiums. Term Life insurance covers the policyholder for a given period. It is low-cost cover and has no cash value. Whole life and universal life are a permanent insurance policy. They cover the insurance interest of the policyholder over their lifetime. The additional feature is the cash value which is an investment earning interests.
