Types of Life Insurance

Life insurance or assurance can generally be divided into two basic classes, namely temporary or permanent. Just to make it even more complicated there are also different sub-classes, namely temporary, permanent, whole life, universal coverage, limited pay,  endowment life insurance.

Temporary life insurance is the most basic of life insurance products. Is the only “pure” insurance type where the policy holder buys the insurance product purely for its coverage. The premium buys protection in the even of death and nothing more. These types of life insurance are generally cheaper than the rest because of the limited exposure levels seen by the insurer.

As the name implies, permanent life insurance policies are designed to stay active until the policy matures at a pre-defined period. The beauty of permanent life insurance policies is that it is almost impossible for the insurer to cancel your insurance unless there was fraud in the application process. Permanent insurance builds up cash reserves and thus reduces exposure by the insurance company to risk and thus lowers premiums over time.

Another type of permanent life insurance is whole life coverage where all the premiums, cash values etc are determined by a set table from the insurance company. The benefit of this type of permanent life insurance is that everything is set forth for you to see. There are no hidden surprises in the form of extra charges etc. Your coverage level is also based on this table that is non-changing.

A newer type of permanent life insurance that you may have heard about is universal life insurance. The main driving force behind the creation of universal life insurance is to increase flexibility in premium payments while also increasing the internal rate of return for the policy. What happens is that the policy is divided into a cash function and a mortality or protection function. When paying your premiums you are adding to both the cash function and mortality function of the premium. If however rates take a plunge, you will pay more due to the shortfall from the cash function and vise versa. This increases flexibility but also exposure to the money markets.

Another simple to understand permanent life insurance policy type is limited pay options. This basically means that you will pay your yearly premiums up to a certain specified date until which point the policy becomes self-sustaining. The generally accepted age at which these types of policies end their requirement for premium payments is 65 year of age.

Endowment permanent policies are very similar to normal permanent insurance products however is specialized to cater for those who take up life insurance much later in life. As a result the premiums are much heavier because the paying periods are substantially shortened. It is important that you know and fully understand the different types of life insurance products that are available. When you request a quote for life insurance you must compare the same policy type to others as the pricing of each type is veyr different.