Definitions of Life Insurance
A life insurance policy provides a monetary benefit when typically the holder of that policy dies. There are many types of life insurance including: term life, whole life, variable life, universal life and universal variable life.-
Term Life Insurance
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Term life insurance is a policy that pays a specific lump sum upon the event that you--the policy holder dies. Also the payout only occurs if the insured person dies within a certain period of time. There are different types of term life insurance with different specified periods of time before the policy expires.
Whole Life Insurance
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Whole life insurance is a policy that covers the entire life of the insured person, as long as the premiums are paid. The policy expires when the insured person dies. With this type of policy, money from your premium is applied to primarily two areas: the insurance portion and the investment portion of the policy that consists of stock, bonds and mutual funds.
Variable Life Insurance
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Variable life insurance is a form of whole life insurance that allows you to borrow from your policy during your lifetime. This policy's death benefit and the cash value fluctuate according its investment performance. Variable life insurance also usually guarantees that the death benefit won't fall below a certain level.
Universal Life Insurance
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Universal life insurance is a variation of whole life insurance that also allows you to borrow from your policy during your lifetime. According to lifeinsure.com, universal life insurance assumes an interest rate and comes up with a projected premium. "If the insurance companies' projections on their universal life policy do not come through, then you may have to come up with higher premiums later, have lower-than-expected cash values or even lose the policy."
Universal Variable Life Insurance
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Universal variable life insurance is a form of whole life insurance that allows you buy a policy while investing in money market, stock and bond funds. CNN's Money Magazine Editor Walter Updegrave says that you can borrow money from the policy in the form of a low-interest rate loan, avoiding taxes. However, he notes in a 2006 article on money.cnn.com, "Once you start borrowing against the policy, you've got to keep paying premiums to keep the policy in force. If you let it lapse, you could be in for a horrendous tax nightmare."
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