Life Insurance Policies

Types of Life Insurance Policies Explained

Life insurance policies have been around since near the beginning of civilization. In ancient china, around 5000 BC policies were offered to merchants about to set out on journeys. The hope was that the merchant would never return to collect. Around 4500 BC life insurance policies were issued by the ancient Babylonians for the same reasons.

In modern history, life insurance got its start in the 18th century in England. Businessmen gathered at a place called Lloyd's pub and began the modern insurance industry. This was the start of the famous Lloyd's of London.

The first accounts of life insurance in the United States were in the 1760's in Philadelphia. They were started by Christian churches to aid the poor in burying their loved ones.

Today's life insurance policies are far removed and much more evolved than their ancestors. Modern life insurance policies are pages and pages of documents designed to protect both the insurer and the insured from fraud. There are dozens of different kinds of life insurance, and the details of each are mind boggling. I will attempt in this article to explain some of the most popular policies and how they work. One small article is not nearly enough space to explain all these options completely. This is meant as an overview.

The three most popular forms of life insurance are Term Life, Whole Life, and Universal Life.

Term Life Insurance

Term life insurance is a policy that has a beginning and an end. It is not meant to accumulate cash value. Its main objective is to provide coverage for a specified period of time for a specified payment, which are called premiums. In a term life policy, the premiums cannot be changed during the life of the agreement. The premium can only be changed at the end of the contract, before renewal. Term life insurance is the most used insurance for group life insurance policies. These policies are usually offered by employers as part of a benefit package that is an incentive to their employees, and is considered part of their compensation. Term life insurance is the best policy for those who want stability with their policies.

Whole Life Insurance

Whole life insurance is a completely different animal than term life insurance. Premiums and value change with the economic climate. The value of these policies accrues interest which adds to the value of the policy over a long period of time. These policies are also called permanent policies. They are more expensive alternatives to term life insurance. They also act as an investment vehicle for the policy holder. Holders of whole life insurance policies are also able to borrow against the value of the policy. The more a holder borrows however, the less there will be to collect at the holder's death. These policies are popular with younger holders who expect a long life, which in turn leads to a profit over many years.

Universal Life Insurance

Universal life insurance policies are a fairly new concept that is a kind of hybrid of both term and whole life insurance. They are considered a permanent life insurance policy, meaning they are meant to only be paid off at the time of the insured's death, to their named beneficiary. These policies cannot be borrowed against. However, they do accrue value through investment. The policy sets up what is called a cash fund. A portion of all premiums are added to this cash account which is invested by the insurance company. The downside to these policies is that if the insurance company invests the money irresponsibly and ends up losing money. Which means your policy loses value instead of accruing value.

Viatical Settlements

Viatical settlements are also a relatively new concept in the life insurance industry. This is becoming a problem to insurance companies because of the way they work. A terminally ill patient who needs or wants cash sells his policy to a company or individual, who then names themselves as the beneficiary of the life insurance policy. The policy is bought at a fraction of the value, but gives the original holder cash liquidity to use while they are still alive. The buyer then collects they money when the seller dies, and they make a tidy profit. Most buyers earn a 35% to 50% return on their investment, and it is legal.