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Various Types of Life Insurance

Various Types of Life Insurance

Many years ago insurance companies offered a very low cost life insurance that was called 20 Year Pay Up Life. A policy was developed that would pay upon the death of the insured for a specific amount, such as $1,000. The beneficiary could also be the person who purchased the life insurance policy, such as a parent for a child. They would pay a very nominal amount each month for 20 years. The premium was typically about $1.00 a month. At that point the policy was considered paid in full. They would have paid $240.00 in total, at that rate. The insurance company would invest the premiums paid in the hope that when the policy was due, there would have been sufficient interest accrued to pay the claim, plus insurance agency costs.

Parents and grandparents quite often would purchase small policies to help with funeral expenses if the child were to die. This type of policy had a cash value and could be borrowed against. As the length the policy is in force beyond the 20 years, interest accrual adds to the value so when benefits are paid eventually the total amount can be substantially higher than the original policy limit. Variations on the policy were 10 year pay and paid in full after age 65. The type of policy is categorized as permanent life insurance.

What is Term Life Insurance?

A term life insurance policy which will be in force for a specific term, or length of time. The premiums are usually low for a large amount of coverage, such as $9.00 per month for $200,000 coverage. Policies of this type were often purchased to provide for a mortgage repayment in the event of the insured's death. The low rate for high coverage reflects the very low risk that the insured was actually going to die during the length of time the policy was in force. At the end of the agreed upon length of time, the insurance is no longer in force and no more premiums are paid.

What is Universal Life Insurance?

A universal life insurance policy has flexible premiums, due to the fact that premiums are paid into a cash account that pays a higher rate of interest. If the interest on the funds already paid is high during good market times, the interest can be used to pay the premium. If the market is poor with low interest rates, the premium will be higher. The cash account can be borrowed from by the insured, and then he 'pays back' himself with a higher premium. Additionally the universal life policy provides the insured with 2 options for pay out. Option A will pay the face value of the policy at death. Option B allows the insurance agency to pay the face value plus the cash account at death. For example, the face value may be $10,000 but the cash account could be double that amount.

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