Many people often wonder what a life insurance policy is and how these policies work. Here is an introductory guide about life insurance policies that can help people learn more about these financial products. The guide first describes what life insurance policies are and what they are used for. The guide then concludes with basic information about the most common types of life insurance policies that are sold in the U.S. today.
--A life insurance policy is a special legal contract between an insurance underwriter and a policy holder.
Life insurance policies are specially designed legal contracts that are sold to individuals to provide policyholders special benefits if the policyholder should die or become gravely ill.
--As a result, life insurance policies are used to cover people for a wide variety of situations.
Most people buy life insurance policies to cover funeral costs and to provide financial protection to their families in case they should die or become too sick to work. However, people can also purchase life insurance policies that provide other benefits.
For example, some people who are about to reach retirement age can purchase a life insurance policy that can be used to augment long-term care health insurance. Other people purchase life insurance policies to provide benefits to their families in they should happen to die in accident. In addition, some people use life insurance policies as investments that act as a hedge against state or federal income taxes.
--As a result, it's important to know something about the types of available insurance policies. This makes it easier to shop for the best policy to meet one's needs.
There are many types of insurance policies that consumers can purchase. They can be broken down into two groups. These groups are called term policies and whole-life policies. Here is a brief introduction to both of these groups.
-- General information about term policies:
Term policies are the most basic form of life insurance. They are meant to be used by policy holders to provide help with funeral expenses and income protection if the holder should die or become very sick. They are sold to people based on how long the policy's terms should be in force. As a result, people can by term policies that can cover them for one, five, 10 or 20 years. Other types of term policies can cover people until they turn 65.
The biggest advantage term policies have over whole-life policies is that they can provide more immediate coverage to policyholders for each dollar spent on coverage. This makes them attractive for young families who expect to earn higher incomes as they grow older.
Examples of term policies include "convertible" products that can be traded in for whole-life policies and "renewable" policies that allow people to renew their coverage after it expires.
--General information about whole-life policies:
Whole-life policies are designed to be enforceable for as long as the policyholder lives. As a result, they offer some advantages over term policies that make them attractive.
The biggest advantage that most whole-life policies have what is called a "cash surrender value." This is the value of the policy is worth that can be paid to policyholders if they should ever want to stop their coverage. It increases as long as the policy is still enforceable and it can be used to cover missed premiums or pay for more limited coverage. It can also be converted into an annuity that provides monthly payments to the policyholder for life.
Examples of term policies include "variable life insurance" policies that offer death benefits and varying lump sum payments and "universal life" insurance policies that let people pay almost any amount they want to at any time.