Life insurance comes in all shapes and sizes, and figuring out all the details can seem overwhelming. The easiest way to discern between the various types of insurance is to remember that life insurance is classified as either temporary or permanent. Temporary insurance is the most common and easiest type of insurance to understand. It remains in effect only for a specific timeframe. Permanent life insurance policies are those that remain in effect for your entire life. The most common examples of permanent insurance are whole life and universal life policies.
Term insurance is the most common type of insurance because purchasers can receive the highest coverage amounts for the lowest premium price, as compared to other types of life insurance. Term life insurance coverage can range from several thousand dollars into the millions of dollars, and term lengths vary anywhere from 5 to 40 years. If the death of the insured person occurs during the term of the policy, the beneficiaries receive the death benefit payout. If the insured outlives the policy term, the policy simply expires.
A variation of term, known as non-med term insurance, is available for those that want to avoid waiting for coverage or undergoing a medical examination. The policy is effective within minutes of applying and requires no needles and no hassle.
Mortgage insurance is a form of temporary insurance designed to cover a mortgage pay-off in the event of the death of the insured. This type of insurance begins with a specific face value based on the mortgage amount. As the mortgage is paid down each month, the face value decreases, although premium amounts generally remain the same. This type of insurance is advantageous for those that have pre-existing medical conditions that might make securing affordable term life insurance difficult.
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Whole insurance covers the insured for their entire life. Whole life policies accumulate a tax-deferred cash value and can earn dividends based on the investments of the insurance company. Premium options include level premiums for the lifetime of the insured, or limited premium payments for a specified duration of time. The cash value of a whole life policy is available to borrow against to cover life expenses. Whole insurance guarantees the policy holder a specific death benefit as well as a minimum cash value. Most policies guarantee the cash value to match the death benefit by age 100.
Universal life insurance is similar to whole life insurance in that it covers the insured person for their entire life. These policies also accumulate a tax-deferred cash value and can earn dividends. This cash value is accessible to borrow against or withdraw from to cover life expenses. Universal life insurance differs from whole life in that it allows more flexibility.
Policyholders can change the death benefit amount and premium payments as desired. Variable universal life is similar to universal life in that it offers flexible payment options, but the cash value is available for investment in the stock market.
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