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Part IV: Understanding Life Insurance
We have all heard it at one time or another in our lives, ‘Do you have life insurance?' It is the biggest question that is asked when major life changes occur such as getting married or having children. But choosing the right life insurance can be a daunting task, especially if you really don't understand the differences between them. The following definitions should help you understand the difference.
o Term Insurance: Basically you are insured for a specified amount of money (say $100,000 dollars) and you pay a yearly premium based on you age and the amount of the coverage that you are looking to have. There are five different types of basic term life insurance.
o Annual Renewable Term: this is when you by a series of one year policies from a company. Each year your premium will be raised, but you are guaranteed the right to renew without having to partake in a medical examination. This is the most common form purchased out there.
o Guaranteed Level Term: This is basically a policy where the company guarantees that you will have a fixed premium for a certain period of time (this can be 5, 10, 15,or 20 years of a fixed amount. This will depend on the policy that you purchase).
o Declining Term: AKA decreasing or reducing term. Basically with these types of insurance the amount of your coverage declines gradually over a certain time frame. You are given the schedule when you sign the paperwork. A common sample of this type of policy would be a mortgage insurance policy. When the homeowner passes away, the insurance policy will pay off the loan balance (which slowly declines over the years as they pay off the loan).
o Convertible Term: With this type of policy you pay higher premiums but it allows you to have your policy roll into a whole life policy without having to pass a medical examination.
o Whole Life Insurance: Also called ‘Cash Value' Insurance policy. This type of policy offers you insurance coverage for a specified amount just like the term life policies. The main difference however is that your premiums never change. You pay the same amount year after year as long as you keep the policy. With this type of policy, you also have the option to borrow against it like a loan.
Choosing and purchasing a life insurance policy is a difficult yet necessary task for young couples and families to do. Not understanding the differences between the different types of policies will only lead you to paying more out of pocket for less coverage. Hopefully by reading and understanding about the different types of life insurance you are now armed with enough knowledge to pick the policy that is right for you.
Julianne Alzamora has 7 years of experience as a freelance writer. Her articles can be seen in several financial websites about investing, investment strategy, personal finance and topics on real estate.
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