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Life Insurance Basics
What's the purpose of life insurance?
Life insurance is usually purchased by individuals to cover loss of
income in case of death and to assist with subsequent expenses such
as medical and funeral bills, child care costs, college expenses,
and the costs associated with day-to-day living, such as mortgage
and rental payments. Death is not always necessary for an insurer to
pay the value of an insurance policy, however; some policies contain
features providing retirement income and cash savings. Life
insurance may offer both protection and savings.
What types of life
insurance are available?
There are many varieties of life insurance policies, but most can be
divided into three basic types: term, whole life and endowment.
1) Term life insurance offers protection for a set number of
years at a fixed premium and generally offers no savings feature or
cash surrender value. The face amount of a term life insurance
policy is generally payable only if the insured person dies during
the period during which he or she is covered by the policy. Term
life premiums are usually the least expensive, but at the end of the
policy term, the policy usually may be renewable at the insured
person's current age and at a higher rate. Some term life insurance
policies contain a "convertible" feature, whereby the term policy
can be converted to a whole life policy, usually without a medical
examination.
2) Whole life insurance (also known as straight life or
ordinary life) provides lifetime protection with limited savings
values. Premium rates are generally constant throughout the life of
the policy contract, and the premiums are payable as long as the
insured person lives. Full payment of benefits is made upon the
death of the insured person, or at attainment of age 97, 98, 99 or
100, depending on the insurance company.
Whole life insurance provides good protection at relatively low
cost. The insurer retains the policy's accumulated savings, but the
policy has a cash surrender value, against which the insured person
may borrow or which he or she may receive if the policy is allowed
to lapse.
"Limited-payment life insurance" is a variation of whole life
insurance; premiums are paid for a set number of years, such as 20
or 30 years, or to age 65, after which protection continues for life
without further payments. The face value of the policy is paid upon
the death of the insured person.
3) Endowment life insurance policies are issued for varying
periods of time (10, 20 or 30 years, for example) and emphasize
savings rather than protection. If the insured person lives longer
than the endowment period, he or she receives the face value of the
policy. If he or she dies during the policy period, the face amount
is paid to his or her beneficiary or estate. Endowment life
insurance usually costs more than term or whole life insurance. It
is commonly used to provide retirement income.
What is variable
life insurance?
Variable life insurance is designed to address inflation. Variable
life insurance policies guarantee a minimum amount will be paid upon
death, but they might pay more, as the insurer invests reserve
monies from insurance policies. The cash value of the policy at its
maturity depends upon the value of the investments made by the
insurer.
How are life
insurance premiums determined?
In addition to being based on the type of policy issued, premiums
are determined by insurers through the use of mortality tables.
These tables are statistical analyses of the deaths of a given group
of individuals, beginning at birth and extending until all members
of the group are dead.
For example, a mortality table will show the likelihood of death in
terms of the number of deaths per thousand persons and in terms of
the expectation of death at each age. So your age is a top factor in
determining your life insurance premium. Other factors include your
health, occupation and hobbies.
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