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A Quick Guide To Life Insurance Policies

Posted on 11, Nov, 2013

Although there are literally dozens of different types of life insurance policies available in the market today they have their origins in two basic types of life insurance:

Whole Life Insurance

A whole life insurance policy, also referred to as a permanent life policy, is one which provides you with insurance throughout your entire life term until you die, at which point the cash value of the policy can be paid to your family. One of the many benefits of this type of insurance policy is that the cash value it accrues over the years is tax free, despite the fact that you're contributing to this policy with payments each month. The only real downside to this type of insurance cover is that for somebody to benefit from this insurance policy the person holding the policy has to pass away, so it's really only of benefit to the family, or partner, left behind.

Term Insurance

As the name of this type of insurance suggests any policy of this type only covers the insured person for a fixed period of time. If, however, they should pass away during that term the policy will pay out, but only the actual amount covered by the policy, unlike the cash savings possibilities offered by a whole life policy instead. If the person holding a term insurance policy does not pass away during the period specified in the policy then most companies will try to convert that same policy to a whole life policy - based on the fact that you've obviously lived past your own predicted expiry date.

Some of the other types of insurance policies you'll find on the market today include:

Universal Life Insurance

This is obviously a variant of a whole life (or permanent) policy, with the major difference being that the premiums paid each year can vary, with any excess in the premium payments being added to the cash value of the policy itself. One of the most popular aspects of this type of insurance policy is that you can usually make withdrawals from it if you have a specific personal need. Universal life insurance policies tend to be more popular because they offer more flexibility and are also more affordable.

Modified Endowment Contract

This is a life insurance contract where the cumulative premiums paid into it during the first 7 years are more than what's needed to pay out on the policy itself, giving them quite a substantial cash value. Basically a modified endowment contract looks and behaves like an annuity while you're alive but also serves as life insurance for when you pass away. A MEC shares many of the same features as a regular life insurance policy, but also has other benefits such as cash accumulation on a deferred tax basis, plus this type of policy is often protected from creditors in many states.

Money Back Life Insurance

If you might need the ability to cash out part of your insurance policy (while you're still alive, of course) then a money back life insurance policy might be perfect for you. A major perk of this type of policy is that if the insured person dies during the term of the policy the beneficiary receives the full amount of the policy, without losing any of the money which might have been claimed back when the insured was still alive.

As you can see it really comes down to whether you want temporary or permanent insurance, because apart from that it's really just a few other differences in each type of policy which sets them apart. 


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