Types & Costs of Life Insurance

By: Christian Rios

There are many forms of life insurance policies available toa potential policyholder but all life insurance policies will always fall undertwo different categories:

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Term Life Insurance - these types of policies are onlyactive for a specified amount of time of your life, called a "term".When the term ends, so does the policy. Payout only occurs should the insureddie sometime within the policies defined term. This type of life insurance isbest used for temporary or shorter term needs: 20-year mortgage, collegeeducation costs for children, and helping to support children and assist withfamily income needs should one of the parents die.

Permanent Life Insurance - this type of policy covers youfor your entire life and will pay death benefits when you eventually die. Thistype of insurance policy is best for "permanent" related needs:burial fees, estate taxes, providing income for a spouse, etc.

Whichever type of insurance policy you choose, there are twofactors that determine its cost: Mortality Cost and Policy Expense Cost.

Policy Expense Cost is the cost of insurance companyexpenses such as office rent, utilities, general staff, and agent commissions.Depending on the type of policy you purchase, this fee can either remainconstant or fluctuate throughout your policy's lifespan.

Mortality Cost is determined by the odds of the insureddying at that particular moment. Obviously, the odds of the insured dyingincrease exponentially with age. To avoid an ever increasing insurance premiumthat correlates directly with the insured's aging, insurance companies averagethe increase and adjust the early premium payments accordingly. Essentially,you are paying an inflated premium when the insured is younger and a much lowerpremium as the insured individual ages, but the actual payment remainsconstant. This overpayment is called "cash value" and must bereimbursed to the policyholder should he or she cancel an existing permanentlife insurance policy early. It is important to note that Term Insurancepremiums increase with the policy holder's age but they will never accrue a"cash value".? When a TermInsurance policy is terminated early, there is no refund for overpayment duefrom the insurer.

Additional life insurance terms you should know:

Beneficiary - This is the person or organization to whom theinsurer will pay proceeds to should the insured die. This could be yourhusband/wife, or your spouse. It could also be your children or a perhaps yourfavorite charity.

Primary Beneficiary - This is the person or organizationthat will be paid upon the insurer's death.

Contingent Beneficiary - This is the person or organizationto which the proceeds will be paid to should the Primary Beneficiary be dead orno longer exist (such as a company or corporation named as the PrimaryBeneficiary). If no Contingent Beneficiary was named in the policy, proceedswill be paid to the Primary Beneficiary's estate.

Face Amount - This is the amount of money payable at time ofdeath. It is usually found on the first page of every Life Insurance policy,whether it's a Term or Permanent policy.

Purchase Options - These are options that can be purchasedthroughout the life of the policy regardless of the insured's health. A goodexample of a purchase option is allowing the policyholder to increase theamount of the policy without having to re-evaluate the health of the insured.

Waiver of Premium - This is an optional coverage thatpermanently suspends your premium in the event that you are disabled. However,you must first be disabled for six months before the waiver takes effect. AdditionallyArticle Submission,this option is quite expensive and may not be necessary should the insured havesubstantial disability coverage.

Life Insurance
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