Kinds of Life Insurance

In economics, insurance is a form of risk management, which involves the equitable transfer of risk from one economic entity (the policy holder or insured) to another entity (the insurer). It is a type of contract, where an insurer or insurance company agrees to pay a sum of money to the policyholder on the occurrence of an insured event. In return, the policyholder or the insured person has to make some payments, known as premiums, to the insurer at regular intervals for a stipulated time period. Similarly, life insurance is also a type of contract, where the insurer pays a certain amount of money on the death or serious illness of the insured individual or the policy holder, in return for a premium paid at regular intervals for a specified time period. Some of the different kinds of life insurance and their advantages have been briefly discussed below.

Kinds of Life Insurance

There are basically two major types of life insurance policies available, term life insurance and permanent life insurance. Permanent life insurance includes sub-types such as whole life insurance, universal life insurance, variable life insurance, and endowment plans. Let's take a brief look at these different life insurance policies along with their advantages.

Term Life Insurance
As the name suggests, term life insurance provides insurance coverage for a specific time period. So, the agreed amount of the insurance would be paid in return of insurance premiums, if the insured event, such as death, occurs within that specified time period. So, it can be said that term life insurance provides protection against risk for a particular time period. This kind of insurance can be especially useful if anyone needs risk coverage for a particular time period. This type of insurance policy is popular among those who have taken a large loan for a long time period. If anything happens within this time period, the insurance company would pay the agreed amount and the burden of paying such a large loan would not fall on the family of the deceased. Typically, term life insurance policies are available for periods of 10, 15, 20 and 30 years, and is a good cheap life insurance option.

Permanent Life Insurance
Permanent life insurance is an insurance policy that provides life long protection unlike term insurance. The policy remains valid till the time of maturity, if the policyholder does not fail to pay the insurance premiums. It provides death benefits as well as cash value. The policy holder can also borrow from this accumulated cash value to meet his personal requirements. This type of insurance policy is usually more expensive than term life insurance, as the cost of insurance is higher for providing both cash value and death benefits. These insurance policies combine the benefits of both insurance and saving. Whole life insurance, universal life insurance, endowment plan and variable life insurance are some of the common types of permanent life insurance.

Whole Life Insurance: The concept of whole life insurance is completely different from that of term life insurance. Here, lifelong protection is provided in exchange of the payment of premium at regular intervals continuously throughout the entire lifetime of the insured. This insurance policy provides complete death coverage irrespective of when it occurs. On the death of the insured individual, the amount of money is given to the nominee or the family of the deceased. There is also a guaranteed cash value for the policy, which the insured individual can borrow. The amount fixed as premium generally shows a gradual upward movement as a person grows older. Whole life insurance is generally costlier than term life insurance, but it has an investment component that gives more benefits than term life insurance.

Endowment Plans: This is a very flexible life insurance, where the agreed sum is paid to the insured person at the end of the policy term - in the event of death or even if he survives the policy term. This means that the insured person will get the agreed sum at the end of the policy term, even if the insured event, i.e. death does not occur. Because of this flexibility, this is a very popular insurance policy.

Universal Life Insurance: Universal life insurance is also known as flexible premium adjustable life insurance. It is a bit similar to whole life insurance. Generally, the insurance companies offer a guaranteed minimum return and they also invest your money. But the policy may end if the cash value is exhausted by the cost of insurance, fees and expenses. But the main advantage is that insurers usually offer two death benefit options, one is the payment of the cash value of the policy, and the other is the payment of the face value of the policy along with the accumulated cash value.

Variable Life Insurance: Variable life insurance or variable appreciable life insurance combines the benefits of both life insurance and investment. There is a separate investment account to which a part of your premium payment is diverted. Now, how much or what percentage of your premium payment you want to divert to this investment account would entirely depend on you. The fund transferred to this account can appreciate or depreciate on the basis of the market conditions. The appreciated amount is tax free, which can be termed as the main advantage of this type of policy.

It is quite difficult to say which kinds of life insurance are more profitable and can give the best protection against risk. The choice of a particular type of life insurance is mainly determined by a number of factors including personal needs and preferences.