A life insurance is a kind of financial protection that an earning member of the family buys, so that in the event of that person's death, his or her family will be secured financially for a predetermined sum.
A life insurance agreement is, therefore, a contract between two parties - the insurer and the insured, where the insured pays regular insurance premiums and the insurer, in case of the death of the insured, provides financial compensation to the nominees of the insured. An insurance contract also contains various details regarding the duration of the insurance, the premium to be paid, etc.
One of the most important factors is that all reasons for death may not be covered by the insurance agreement, such as accidental death, murder, suicide, etc. Some people also use a life cover to reduce their tax burden as the insurance premium is deducted from taxable income.
A term insurance is a policy for a relatively shorter period of time. Here, the insurance benefit will be paid only on the death of the insured. In case the insured does not die during the covered term, the insurance amount does not get carried over. Thus, there is no penalty for not renewing a term insurance and the renewal is completely at the discretion of the insured. Premium of such a policy increases with the age of the insured as the probability of his or her illness or death also increase. This type of policy is generally tax-free.
A permanent insurance is what the name suggests: a cover that lasts for as long as you live. Along with insurance, this policy also provides a savings element which builds a cash value. The premium remains the same across insurance providers and is understandably higher than a term cover premium. The policy lapses if the insured defaults on a payment and does not reinstate it. There are various sub-types of such a cover as described below.
Whole Life Insurance
It is a basic form of permanent life insurance, wherein the premium consists of a factor for actual insurance premium and one that goes towards a cash savings account. Interest gets accrued on these savings. In case of the death of the insured, the nominee gets both the accumulated savings as well as the death benefit.
Universal Life Insurance
It is almost exactly like the whole life insurance policy. The only difference in this type of cover is that the insured is allowed some flexibility to modify the insurance premium and the savings component.
Variable Life Insurance
Here, the policyholder is allowed to pick where the money saved, is to be invested. He or she has the flexibility to invest the savings in a higher growth investment plan.
Usually, the insurers provide the insured with the flexibility to choose the policy which is most suitable after proper fact-finding and analysis.