Life Insurance Policy
The term Life Insurance should be taken literally. A life insurance policy is exactly what it says it is: a type of insurance that pays cash to your survivors when you die. You should purchase life insurance to provide for the financial security of your family when you die, or to protect your business partners from losing their investment in a jointly-owned business after your death. There are some other reasons for buying life insurance, but these are usually related to business transactions and guarantees in some way.
Don’t buy life insurance as a retirement plan or an “investment,” or as a way to get low-cost loans. There are plenty of other financial vehicles that are designed for those purposes. Here is an explanation of the two basic types of life insurance available on the market today.
Term life insurance affords you the ability to buy a specific amount of life insurance for a particular period (the term). Term life insurance builds no cash value and has no loan or surrender value.
Term life insurance is an excellent way to inexpensively buy large amounts of life insurance to protect against your death at critical points in your life. For example, parents may purchase term life insurance in an amount sufficient to guarantee their children’s ability to attend college should either of the parents die during their prime earning years.
Whole life insurance or "ordinary," life insurance policy is designed to remain in force from the time it is purchased until the time that the policy owner dies. Whole life insurance policies build up a cash value throughout the years, and that money may be taken out from the policy as a loan. Typically the loan need not be repaid until the policyholder dies. At that time that life insurance company will reduce the amount of the lumpsum payment by the amount that the policyholder borrowed.
There are other types of life insurance available including something sold by life insurance companies called an annuity. Annuities and different kinds of policies fall into the range of investment vehicles so they will not be discussed here.
No matter which type of life insurance policy you end up buying, the key is to buy it from a company that is financially stable and licensed to write policies in your State. Visit both the A.M. Best Company’s website to check on your insurance company’s industry rating and the website of your State Insurance Commissioner before you buy.