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How does life insurance work?

Everyone knows that life insurance pays out when the named person dies.

The idea is to protect loved ones from a sudden loss of financial support. But there are three basic types of life insurance that differ in their details.

Term life insurance is known as “pure” life insurance, because it will pay out the death benefit if the named person dies within the defined term (anywhere from one to 30 years), but if the named person does not die, no portion of the premiums will be returned to the policyholder. It simply insures against loss of life, and the relatively low premiums reflect this. Most term life insurance policies are renewable and convertible.

Whole life insurance has no predefined term; it provides death benefit protection over the “whole” life of the insured, as long as premiums are paid. A whole life policy also combines an investment component with the insurance component: it accumulates a cash value which the insured can withdraw or borrow against over their lifetime. However, compared to other forms of investing, life insurance policies tend to offer a relatively low rate of return (not least because of the fees and commissions involved in insurance policies). Consult someone knowledgeable about financial planning before choosing a whole life insurance policy.

Universal life insurance is type of flexible permanent life insurance offering the low-cost protection of term life insurance as well as a savings element (like whole life insurance), which is invested to provide a cash value buildup. The death benefit, savings component and premiums can be reviewed and altered as a policyholder's circumstances change. Unlike whole life insurance, universal life insurance allows the policyholder to use the interest from his accumulated savings to help pay premiums over time.

 

Universal life insurance is type of flexible permanent life insurance offering the low-cost protection of term life insurance as well as a savings element (like whole life insurance), which is invested to provide a cash value buildup. The death benefit, savings component and premiums can be reviewed and altered as a policyholder's circumstances change. Unlike whole life insurance, universal life insurance allows the policyholder to use the interest from his accumulated savings to help pay premiums over time.

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