Life insurance is a contract between the company that insures and the person that’s being insured, who states that if the insured person died the company would cover their loss financially. Sometimes the life insurance companies include terminal and critical illness in the contracts, or even sometimes they include the funeral expenses.
The main advantage of the person who has the insurance policy is the peace of mind of knowing that if he dies, his loved ones and his family will deal much easier with the financial problems. Life insurance is a legal contract and his terms describe the limitations of the insured person’s events such as suicide, fraud, war and civil commotion.
Life insurance contracts divide in two major categories:
- Protection policies – which are designed to provide funds in the event of the person dying. Usually a sum payment.
- Investment policies – Their main objective is facilitate the growth of capital by regular or single premiums. The most common forms of these policies in the US are whole life, universal life and variable life.
Also life insurance can be divided into five subclasses and those are:
- Term insurance – Term insurance provides life insurance coverage for a certain item. This policy doesn’t accumulate cash coverage. Term is generally considered as “pure” insurance, where the person buys the insurance in the event of death and nothing else. The term can be for one or more years.
- Whole life coverage – Whole life insurance provides lifetime death benefit coverage for a level premium in most cases. Premiums are much higher than term insurance at younger ages, but as term insurance premiums rise with age at each renewal, the cumulative value of all premiums paid across a lifetime are roughly equal if policies are maintained until average life expectancy.
- Universal life coverage – Universal life coverage is quite a new product in the insurance business, who combines premium insurance coverage with bigger flexibility with premium payment and with greater growth of cash values. There are a few types of universal life coverage who include interest sensitive, variable universal life, guaranteed death benefit and equity indexed life insurance.
- Endowment life insurance – Endowments are where the cash value policy equals the death benefit at a specific age. The age at where this kind of insurance is reached is known as the endowment age. Endowments are more expensive than either whole life or universal life because the premium paying period is shortened and the endowment date is earlier. Endowment insurance is paid out whether the insured person lives or dies, after a specific period or a specific age.
- Accidental death – Accidental death is a limited life insurance designed to cover the insured if they die in a accident. Accidents include anything from a light injury and more serious injuries, but do not typically cover deaths resulting from health problems or suicide. Because they only cover accidents, these policies are much cheaper than other life insurance policies. It is also very commonly offered as accidental death and dismemberment insurance.