Life Insurance Versus Life Assurance
It is said that there are only two certainties in life: death and taxes. Life insurance is designed to provide a hedge against the consequences of death, and especially unexpected death. In the United Kingdom, life insurance is also known as life assurance. The terminology reflects the true purpose of life insurance (or life assurance) policies: financial protection against loss of income due to the death of the policy holder. There are several types of life insurance policies; each one has a stated purpose. Depending on your circumstances, one or more life insurance policies may provide the protection you would like to provide for your loved ones.
Term or Level Life Insurance
Term or level life insurance refers to a life assurance policy with a set term. As long as you pay the premiums on time, the policy remains active for as long as the stated term dictates. However, once the term expires for a term or level life insurance policy, all coverage terminates. Term or level life insurance policies are often recommended for younger people, because they offer larger benefit payouts for a lower cost than permanent life insurance. It is also usually easier for younger people to qualify for term life insurance coverage. With a term life insurance policy, if you die unexpectedly, your spouse or partner or any other named beneficiaries would receive a lump sum payment. The cash could be used to cover your final expenses, along with maintaining your mortgage and car payments, or providing an educational fund for your children.
Permanent Life Insurance
Permanent life insurance policies are open ended; as long as you pay the premiums on time your coverage continues, even if you live past your nineties. Many older people choose permanent life insurance because underwriters often hesitate to approve term life insurance policies for older policy holders. Permanent life insurance also includes an investment component, which means that the policy builds cash value, much like equity builds in a house during the term of a mortgage. The cash value that builds in a permanent life insurance policy can be borrowed to cover emergencies, or dispensed in regular payouts to provide a source of income during retirement.
Increasing Life Insurance
Increasing life insurance policies are indexed to reflect the rate of inflation or some other benchmark, and with periodic increases in the benefit payout. Obtaining an increasing life insurance policy can be a hedge to protect against eroding spending power during periods of high inflation. Increasing life insurance policies can also be purchased to protect against the loss of assets that tend to increase in value over time, such as rare collectibles, museum quality art or fine jewelry.
Decreasing Life Insurance
Decreasing life insurance policies are designed to provide a payoff for a given asset or financial obligation if the policy holder dies before the financial obligation is completely satisfied. Examples of decreasing life insurance policies are mortgage insurance and insurance policies designated to pay off the note on an automobile or other recurring debt. With a decreasing life insurance policy in place, you are assured that an existing financial obligation will be paid off, which relieves the burden from your family or loved ones. On the other hand, as the amount of the remaining debt shrinks, so do your premiums, so that you are not obliged to continue to pay large premiums that are designed to cover the entire amount of your financial obligation.
Choosing the Right Life Insurance Policy
Your life insurance needs will change during the course of your life. As a young parent with a new mortgage, you may want to obtain a large term life insurance policy, along with mortgage insurance or a life insurance policy to cover the cost of university education for your children. As you grow older, you may transfer your term life insurance policy to a whole life policy. When you pay off the mortgage, you may drop the mortgages insurance. On the other hand, if you purchase a piece of valuable jewelry for your spouse or partner, you may obtain an increasing life insurance policy to cover the cost of replacing the jewelry in case of loss or theft. A life insurance agent can be valuable in assisting you in choosing the right coverage for your particular circumstances.
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