Major types of life insurance
If insurance terms leave you dazed and confused, here's
a quick cheat sheet for four major types of policies. Keep in mind
that definitions may vary slightly from company to company and from
state to state:
Term insurance -- The simplest
form of insurance. You purchase coverage for a specific price for
a specified period. If you die during that time, your beneficiary
receives the value of the policy. There is no investment component.
Whole life -- Similar to
term, but you purchase the policy to cover your "whole life"
not just a set period. Premiums remain level throughout the life
of the policy, and the company invests at least a portion of your
premiums. Some firms share investment proceeds with policyholders
in the form of a dividend. Many companies will offer "a relatively
low guaranteed rate of return," but in reality pay at a rate
in excess of the guarantee.
Universal life -- You decide
how much you want to put in over and above a minimum premium. The
company chooses the investment vehicle, which is generally restricted
to bonds and mortgages. The investment and the returns go into a
cash-value account, which you can use against premiums or allow
to build. With some policies, sometimes called Type I or Type A,
the cash account goes toward the face value of the policy on the
death of the policyholder. With a second variety, sometimes called
Type II or Type B, the beneficiary receives the face value of the
policy plus all or most of the cash account. While Type II is meant
to provide a partial hedge against inflation, it demands higher
premiums as you get older than Type I.
A variation of a universal policy, often called universal
variable life, allows policyholders to choose investment vehicles.
Variable life -- With a variable
policy, there is usually a wider selection of investment products,
including stock funds. As with a universal policy, returns on investments
can offset the cost of premiums or build in the account. And depending
on the type of policy, the beneficiaries will either receive the
face value of the policy or the face value plus all or part of the
-- Compiled by Dana Dratch