What is Insurance Policy?

Insurance Policy

Insurance policies are contracts that indemnify the insured against a certain loss. However, they are often difficult to understand. This article breaks down the five parts of a policy to help you better understand your insurance coverage.

To find the right type of life insurance for you, talk to a licensed independent broker like Policygenius or your financial advisor. These experts can help you through the whole process while offering transparent, unbiased advice.

Types of life insurance policies

There are many different types of life insurance policies. Some people have group life insurance through their jobs, while others get individual coverage through an independent company. In either case, the policy outlines the amount of money that will be paid to the beneficiary in the event of a specified peril.

The payout from a life insurance policy can be used for a variety of purposes, such as paying off debt, providing income for your family, or giving a financial gift to loved ones. The type of life insurance policy you need depends on your circumstances and budget. The two most common types are term and permanent life insurance. Term policies last for a specific period, while permanent policies cover your entire life and build cash value over time.

Term life insurance

Term life insurance is a form of coverage that provides a lump sum death benefit to your beneficiaries if you die while the policy is active. It is typically less expensive than whole life insurance and does not build a cash value. It may be an appropriate option for those who need financial protection only for a specific period of time. Many people get this type of policy through their work or as part of a group plan.

Term life insurance policies are active for a specific term, which can be 10, 20, or 30 years. Unlike whole life and universal life policies, which last for your entire lifetime, term life policies do not have a cash value component that can be cashed out or borrowed against.

Whole life insurance

Whole life insurance offers a death benefit and cash value savings component that lasts for the insured’s lifetime. A portion of the premium is used to save this money, which can be accessed as a loan during the policy’s lifetime. Some whole life policies are called final expense policies or burial insurance, and they are designed to help with funeral costs and other end-of-life expenses.

Whole life insurance is available in several different forms, including a level premium policy, which has fixed premium payments for the entire policy’s duration; and an increasing premium policy, which has higher premiums over time to reflect rising inflation or insurance costs. You can also choose a graded premium policy, which has lower premiums in the early years and then gradually increases.

Universal life insurance

Universal life insurance is permanent coverage that builds cash value over time. The policyowner can decide when to increase or decrease premium payments, as long as the amount paid stays within established limits. However, the policyholder needs to make sure the amount of payments and any available cash values in the account will cover the cost of the insurance and charges.

This type of policy also has a surrender charge, which deducts the amount of cash value withdrawn from the account. In addition, the policyholder may have to pay extra premiums if the policy’s current or potential cash value isn’t enough to cover all the charges. Because of these factors, a UL policy requires more maintenance than whole or term life policies.

Variable life insurance

Unlike whole or universal life policies, variable policies allow the policyholder to invest the policy’s cash value in market securities. As a result, the policy’s death benefit can increase or decrease with the performance of those investments. This flexibility and variability makes them less suitable as long-term savings vehicles, but they can be a good fit for some people who want to combine life insurance with investment opportunities.

When shopping for a life insurance policy, you’ll want to carefully evaluate your needs and consider all of the options available. While life insurance is not a necessity, it can help protect your loved ones from financial hardship in the event of your death. For more information about how life insurance works, speak with a Bankrate adviser.