LIFE INSURANCE

We know that insurance can be pretty confusing. Here is a quick cheat sheet of the four major types of policies. Keep in mind that definitions may vary slightly from company to company and from state to state:

First off, life insurance is a protection against the loss of income that would result if the person insured were to pass away. The person named the beneficiary would receive the proceeds and would be safeguarded from the financial impact of the death of the insured. The main purpose of life insurance is to provide an amount of financial security for your family after you pass away. You should think about the type of living you would like for your family before you purchase a life insurance policy. You should definitely take another look at your policy whenever a life event happens, such as, marriage, divorce, a birth or adoption of a child, or purchase of a major item like a business or a house.

1) Term insurance – This is the simplest form of insurance. You purchase coverage for a specific price for a specified period. If you die during that time, your beneficiary will receive the value of the policy. There is no investment component.

2) Whole life – Whole life insurance is similar to term, but you purchase the policy to cover your "whole life" and not just a set period of time. Premiums remain the same throughout the life of the policy, and the company will invest 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 very low guaranteed rate of return. In reality they pay at a rate in excess of the guarantee.

3) Universal life – With Universal life insurance, you decide how much you want to put in over and above the 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 you to build on. The cash account goes toward the face value of the policy on the death of the policyholder, with some policies, sometimes called Type I or Type A. The beneficiary receives the face value of the policy plus all or most of the cash account, with a second variety, sometimes called Type II or Type B. Even though Type II is meant to provide a partial hedge against inflation, it also demands higher premiums as you get older than Type I does.

4) Variable life – Variable life insurance is a variation of a universal policy, often called universal variable life, and it allows policyholders to choose investment vehicles. With a variable policy, there is usually a wider selection of investment products, including stock funds. With a universal policy, returns on investments can offset the cost of premiums or build in the account. The beneficiaries will either receive the face value of the policy or the face value plus all or part of the cash account, depending on the type of policy.