From its humble beginnings in the early 1700s, life insurance in the United States of America has become a very big business. Today it comprises of a never-ending list of corporations and to the newcomer, it is utterly confusing. What we will do here however is not to go into the details of the various life insurance corporations in the U.S. today but to take a look at the types of life insurance available.
To begin with, let us first consider the concept of life insurance. Life insurance can be defined as a contract between individual/s and a corporation which offers a guarantee of a payment (death benefit) to be made against the life of the individual/s by the corporation in return for regular payments (premiums) paid to the corporation. The way the contract is drawn out to make the payment defines the type of life insurance policy that has been sold to the customer.
There are two basic types of life insurance available in the U.S. – whole of life insurance and term insurance. The two names are self-explanatory. While whole of life insurance covers the entire period of the policyholder’s life, the coverage of term life insurance covers the life of the policyholder for a limited period of years. There are some policies which are a combination of the two categories.
It is cheaper than regular whole of life insurance and therefore more popular. Term life insurance covers a particular period usually for a period of anything between five to twenty years. There is normally a provision to renew the coverage for some more years.
The main feature of this type of life insurance is that there is a possibility of payment against the life of the policyholder only during the term defined in the policy. For instance, say Mr. X takes out a tern life insurance policy for 10 years. He dies the day after the policy goes live. Then the beneficiaries get the full payment as per the terms of the contract. If Mr. X survives the entire 10 years, then neither he nor his beneficiaries get a single penny.
There are three sub-categories of term life insurance:
Level term life insurance: Here the death benefit remains level throughout the term of the policy. The premium may increase or remain the same depending on how the policy is written.
Increasing term life insurance: In this case, the death benefit will be the least in the early years. It increases over time to a maximum possible limit just before the end of the term. This type of policy is useful for older people where there is more possibility of death towards the end of the term. Premiums usually increase in line with the increase in coverage.
Decreasing term life insurance: Here the death benefit payable decreases over the years. This is useful when the insured is a child where the need for coverage decreases as the child gradually becomes independent. Premiums usually remain level throughout the term.
This policy covers the entire life of the policyholder. If premiums are paid regularly, there is no need to renew. Changes in legislations however might cause amendments in the policy. Premiums may remain level or may increase at a rate defined in the contract.
Life insurance policies in general do not have a cash value. However some whole of life insurance policies offer dividends. This means that the company shares some of the profits (if any) with the policyholder.
Cash value life insurance: This is a facility given to those who would like to have a savings element to their life insurance policy. Here a part of the money is put into a cash fund which is invested and adds to the value of the policy over time.
Flexible premium universal life insurance: As the name suggests, the main feature of this type of policy is flexibility. The policyholder may at any given point of time change the variables such as death benefits, premium amounts, length of term and so on. Here also there are policies which have a guarantee and policies which have a variable return, the return if at all, depending on the investment component of the policy and market performance. One has to be very careful in the choices and changes made to such policies as sometimes it may not be to the advantage of the policyholder.
Group policies: Group life insurance policies are usually offered to members of an organization like institutions, companies or clubs. This is a very good option to people who for some reason are unable to have an individual life insurance policy.
Special life insurance policies: There are several policies which cater to specific needs in certain unique cases like credit health and accident coverage, credit life and prepaid funeral services to name just a few. It is quite beyond the scope of this article to go into too much detail about these as the subject is quite exhaustive.
A last word to add is that life insurance is governed by federal laws and so the features of policies may vary from state to state and it would be advisable to study them in respect to particular states.