What Are The Main Types Of Policy?

By Author: Marcus Stalder
Total Articles: 491
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In a sense, this is the easiest of all the questions to answer because it all comes down to a choice between two basic types. Term life is what you might call a pure form of insurance. You agree a fixed amount payable in the event of your death during the term set. If you die, the company pays that amount. If you are still alive when the term expires, you are now without insurance cover. Because the majority of people are finding their life expectancy rather better than they had thought when young, the insurers do not pay out on many term policies unless there's an accidental death. No one can predict a traffic accident. So the premium rates are low, offering potentially very good lump sum payments to your family for a relatively small outlay.

The second major type offers permanent protection while accumulating a cash value. The so-called whole life policy offers a basic minimum lump sum plus a bonus from investments. In the majority of cases, the management of the investment is delegated to the insurer but, if you think you can do better, there can be options for you to guide the investment. We then get into a small ...
... jungle in which you have to judge how much risk you want to accept. In a variable life policy, for example, you can abandon the fixed lump sum in favor of greater returns from the investment account. Universal life gives you the right to borrow from the insurer or actually withdraw some of the accumulated cash value should an emergency arise. This also has greater flexibility, allowing you to vary the amount of premium you pay. The maximum control comes to you through a universal variable policy. This has separate accounts and you can manage where your money goes as between stocks, bonds and the money market. If you make good decisions, there are good tax free returns.

When you are young, a term insurance policy can give you low-cost protection during the first years of your adult life. The question you have to ask is whether this represents the best long-term value. Should your health not hold up, renewing the term or switching to whole life may become impossible unless you bought a convertible term policy. The other factor is inflation. If you buy a whole life insurance policy early, the premium may start off higher but, over time, it becomes more affordable as your pay rises. If you delay, the cost of the whole life cover rises as your life expectancy falls. What you may find a slight struggle when you buy during your twenties, will cost you significantly more if you ask to buy the same amount of cover during your forties. Equally important is the question of a medical. As a young buyer, the insurer is likely to wave you through without any comprehensive medical exam. But as the years pass and your weight rises, the risk of different diseases and disorders increases. You may find it more difficult to buy whole life even if you can afford it. Life insurance is all about taking the decisions at the right time. In reality, all this should be discussed with a knowledgeable advisor before you make any commitments. Early mistakes can lock you into unfortunate policies.