Types of Life Insurance

There are different types of life insurance policies. The type of policy you have can effect how much you pay in premiums over time, and if you get any additional benefits. All companies handle their policy's differently, but here is a general description of the two main types of policies:
 

Term Life Insurance- This is the simplest type of policy. The coverage lasts for a set period, so long as you pay the premiums. If a policyholder dies within the time period set by the policy, then the insurance company will have to pay the benefactors the agreed upon coverage amount. Policyholders have the option to renew their policy at the end of each term, usually annually.

 Younger adults can get generous term life coverage for cheap premiums because they are less likely to die suddenly and need the policy amount paid out. Term life insurance premiums get more expensive as people get older as it becomes increasingly more likely that the company will have to pay out the coverage.

Whole-Life Insurance- This is a permanent life insurance policy that provides coverage for death but also an investment fund. This type of policy will pay a clearly stated, fixed amount upon the event of the policyholder’s death. The premiums paid usually stay the same throughout the length of the policy. The part of premium is used by the insurance company to make investments, so the premiums build additional cash value. Policyholders can borrow against the cash value accumulated through the investments.

Reference:

CNN Money. Types of life insurance. Money 101. Retrieved from

         http://money.cnn.com/magazines/moneymag/money101/lesson20/index2.htm

Video Post: How Does Life Insurance Work?

This video is from the financial information website Investopedia. It quickly describes why someone would purchase life insurance and how a company could lose money if someone does not live as long as expected, and how to counteract that. Follow the link to watch the video.
 http://www.investopedia.com/video/play/life-insurance/

The Reason for Life Insurance

Have you seen commercials for life insurance before? Maybe they run in the middle of the day during your favorite game show, and usually feature happy older adults who want to cover their final expenses? Commercials like these probably have led you to believe that life insurance is meant for older people, or that the main purpose of it is to cover funeral costs. However, this is not the case. While these advertisements target retirees and grandparents, young parents are actually in the greatest need of life insurance.

Why is this so? Well, life insurance is not meant to cover just the cost of a funeral or a few unsettled debts. Life insurance is meant to provide financial support to a person’s dependents should he or she pass away. Older, retired adults usually have assets from years of working and mortgage paid off if they owned one as well as dependents have grown up and therefore usually do not need a lot of insurance coverage. On the other hand, young and middle-aged adults often work to support a family, and life insurance plans are more helpful in unlucky circumstances.

A dependent is anyone who relies on another’s income in order to survive, and they are the real reason most people need life insurance. Small children, for example, cannot get a job to support themselves if something unfortunate were to happen to their parents, much less pay off any debts that were left behind. If widowed, unemployed spouses may face difficulties paying for the expenses that pile up. Employed spouses may fair better without an insurance pay out, so long as the lost income was not needed to care for children or pay off debts. After children grow up or a spouse becomes employed, people can often save money and cut their insurance coverage because fewer people are relying on their income.

The amount of insurance coverage a person needs can usually be determined by the number of dependents and the amount of debt that he or she has. There are also many different types of life insurance plans, and we will discuss a few in a later post. Life insurance is a personal decision, but keep in mind the real reason why insurance is important so you can make the right choices in the future.

READERS, what do you think?

Why do you think some people with dependents do not have life insurance policies?

Do you think some people have more life insurance coverage than they need? How so?