There are two major types of life insurance—term and whole life. Whole life is sometimes called permanent life insurance, and it encompasses several subcategories, including traditional whole life, universal life, variable life and variable universal life. In 2018, 4.0 million individual life insurance policies bought were term and about 5.9 million were whole life, according to the American Council of Life Insurers.
Life insurance products for groups are different from life insurance sold to individuals. The information below focuses on life insurance sold to individuals.
Principals of Life Insurance Term
Term Insurance is the simplest form of life insurance. It pays only if death occurs during the term of the policy, which is usually from one to 30 years. Most term policies have no other benefit provisions.
There are two basic types of term life insurance policies: level term and decreasing term.
- Level term means that the death benefit stays the same throughout the duration of the policy.
- Decreasing term means that the death benefit drops, usually in one-year increments, over the course of the policy’s term.
In 2003, virtually all (97 percent) of the term life insurance bought was level term.
For more on the different types of term life insurance, click here
Whole life/permanent Insurance
Whole life or permanent insurance pays a death benefit whenever you die—even if you live to 100! There are three major types of whole life or permanent life insurance—traditional whole life, universal life, and variable universal life, and there are variations within each type.
In the case of traditional whole life, both the death benefit and the premium are designed to stay the same (level) throughout the life of the policy. The cost per $1,000 of benefit increases as the insured person ages, and it obviously gets very high when the insured lives to 80 and beyond.
The insurance company could charge a premium that increases each year, but that would make it very hard for most people to afford life insurance at advanced ages. So the company keeps the premium level by charging a premium that, in the early years, is higher than what’s needed to pay claims, investing that money, and then using it to supplement the level premium to help pay the cost of life insurance for older people.
By law, when these “overpayments” reach a certain amount, they must be available to the policyholder as a cash value if he or she decides not to continue with the original plan. The cash value is an alternative, not an additional, benefit under the policy.
In the 1970s and 1980s, life insurance companies introduced two variations on the traditional whole life product—universal life insurance and variable universal life insurance.
What Are the Benefits of Life Insurance Plans?
Once you get an understanding of what is life insurance meaning, as well as the different types of life insurance policies, you will find that there are 3 main advantages of getting the best life insurance policy that you should know about. Following are the 3 primary benefits offered by different types of life insurance policy:
1. Financial Security
Life is unpredictable and can be full of uncertainties. It is difficult to reduce the possibility of an unfortunate event like death. In such a scenario, the family faces financial constraints arising from the lack of a steady income.
Investing in the best life insurance policy early on in life acts as a safety blanket during such eventuality. According to the life insurance definition, the insurance provider is obliged to pay the nominee or beneficiary the pre-defined sum assured. As a result, even in the policyholder’s absence, his family stays protected.
2. Long-Term Savings
If one wants to make long-term investments, it’s important to think about life insurance meaning. Such insurance plans help you make systematic savings and create a corpus, which can be used for several reasons, such as building a new home, financing quality schooling for your child, and funding a child’s marriage expenses.
What’s more, when you learn the life insurance definition, you will find some types of life insurance policies often offer monthly pay-outs in the form of annuities, which is an ideal way to aim at and achieve retirement goals.
3. Investment Options
Understanding the meaning of life insurance in your financial context will allow you to plan your investments efficiently as well. Life insurance providers offer Unit-Linked Investment Plans (ULIPs), which are mainly investment instruments based on the market linked returns and life insurance, meaning you can get dual benefits with a single financial product.
These market-linked life insurance products provide significant gains during maturity, therefore making them ULIPs a reliable investment tool.
4. Tax Benefits
According to the life insurance definition, you are required to pay regular premiums to keep the policy active. With life insurance plans, you also get tax benefits under prevailing laws as per Income Tax Act, 1961. The life insurance premium paid can be availed as a tax deduction under Section 80C of the Income Tax Act, 1961. You can avail of deduction up to Rs.1.5 lakh under Section 80C.