What is life insurance – Types of life insurance


Life insurance is a contract between a life insurance company and a policy owner. It ensures that the insurer will provide a designated sum of money to one or more beneficiaries upon the death of the insured person. This guarantee is made in exchange for regular premiums paid by the policyholder throughout their lifetime.


Types of Life Insurance


A wide range of life insurance options exists to cater to various needs and preferences. It is crucial to carefully evaluate the short- or long-term requirements of the insured individual in order to make a significant decision regarding the selection of either temporary or permanent life insurance.


Term life insurance


Term life insurance is designed to last for a specific period, determined by the policyholder. This duration can be chosen at the time of policy purchase and commonly ranges from 10 to 30 years. The ideal term life insurance policies strike a balance between affordability and long-term financial stability.


Decreasing term life insurance is a type of renewable term life insurance that offers coverage that gradually reduces over the course of the policy’s lifespan, following a predetermined rate. Convertible term life insurance gives policyholders the option to convert their term policy into permanent insurance coverage.

life insurance

Renewable term life insurance provides an initial quote at the time of purchase, with premiums that increase annually. This type of policy is typically the most cost-effective choice for term insurance in the early stages.


Many term life insurance policies offer the option to annually renew the contract once the term expires. This allows you to extend your life insurance coverage. However, it is important to note that the renewal rate is determined by your current age, which means that premiums can significantly increase each year.


If you are seeking a more favorable solution for permanent coverage, it is recommended to convert your term life insurance policy into a permanent policy. It is worth mentioning that not all term life policies provide this conversion option, so it is advisable to seek a convertible term policy if this feature is essential to you.


Permanent Life Insurance?


Permanent life insurance remains active throughout the insured individual’s entire lifetime unless the policyholder ceases to pay the premiums or surrenders the policy. It is a more costly option compared to term life insurance. Whole life insurance falls under the umbrella of permanent life insurance.


It accumulates a cash value that is intended to cover the insured person’s lifetime. Cash-value life insurance also provides the policyholder with the ability to utilize the cash value for various purposes, such as obtaining loans or cash or paying policy premiums. Universal life (UL) insurance is another form of permanent life insurance that incorporates a cash value element that earns interest.


Universal life insurance offers flexible premium options, allowing adjustments over time, and can be structured with either a steady death benefit or an increasing death benefit, unlike term and whole life insurance. Indexed universal life (IUL) is a specific type of universal life insurance that permits the policyholder to earn a fixed or equity-indexed rate of return on the cash value component.


Variable universal life (VUL) insurance allows the policyholder to invest the cash value of the policy in a separate account. It also offers flexibility in premium payments and can be designed with either a level death benefit or an increasing death benefit.

Who Needs Life Insurance?


You require life insurance to ensure financial protection for your spouse, children, or other family members in the unfortunate event of your demise. The death benefits provided by life insurance policies, based on the policy amount, can assist beneficiaries in paying off a mortgage, financing college tuition, or contributing towards retirement savings. Additionally, permanent life insurance incorporates a cash value element that grows gradually over time.


How Do You Qualify for Life Insurance?

To be eligible for life insurance coverage, it is necessary to complete an application. Life insurance, however, is accessible to nearly everyone. Nonetheless, the cost or premium amount can vary significantly depending on factors such as your age, health, and lifestyle. Certain types of life insurance policies do not necessitate medical information, although they generally come with considerably higher premiums and entail an initial waiting period before the death benefit becomes accessible.


What Affects Your Life Insurance Premiums and Costs?


Many variables can impact the cost of life insurance premiums. While certain factors may be beyond your control, there are other aspects that can be actively managed to potentially reduce costs both before and after applying for coverage. The most influential factors in determining the cost of life insurance are your age and health status, which is why it is generally advisable to purchase coverage as soon as the need arises.


Once you have obtained an insurance policy and if your health has improved or if you have made positive changes to your lifestyle, you have the option to request a reevaluation of your risk class. Even if it is discovered that your health has declined since the initial underwriting, your premiums will not increase.


However, if it is determined that your health has improved, your premiums may decrease. Additionally, there is the possibility of acquiring additional coverage at a lower rate than your initial policy.


How much is life insurance?


The cost of life insurance varies widely depending on several factors, including the type of policy, your age, health, lifestyle, coverage amount, and the insurance company you choose. Here are some key factors that influence the cost of life insurance:


1.Type of Policy


Term Life Insurance: Typically, term life insurance is the most affordable option. It provides coverage for a specific term (e.g., 10, 20, or 30 years) and pays out a death benefit if you pass away during that term.


Whole life insurance 


Whole life insurance is a permanent policy that offers coverage for your entire life. It tends to be more expensive than term life due to the investment component and guaranteed cash value.


Universal Life Insurance


Universal life insurance is another form of permanent insurance that can be more flexible in terms of premiums and coverage. It can vary in cost depending on how it’s structured.




In general, younger individuals pay lower premiums for life insurance because they are considered lower risk. Premiums tend to increase as you get older.




Your health plays a significant role in determining the cost of life insurance. People in good health typically receive lower premiums. Insurance companies may require a medical exam and review your medical history to assess your health.




If you engage in high-risk behaviors such as smoking, heavy drinking, or participating in dangerous activities, you may pay higher premiums or have limited policy options.


5.Coverage Amount


The amount of coverage you choose affects the cost of your policy. Higher coverage amounts result in higher premiums.




Historically, women have paid lower premiums than men for life insurance because they tend to live longer. However, this gap has been narrowing in recent years due to changes in underwriting practices.


7.Term Length

For term life insurance, the length of the term affects the cost. Longer terms generally have higher premiums.

8.Insurance Company

Different insurance companies have their underwriting guidelines and pricing structures. It’s a good idea to compare quotes from multiple insurers to find the most competitive rates.

To get an accurate idea of how much life insurance will cost you, it’s best to request quotes from insurance companies or work with a licensed insurance agent or broker. They can help you assess your specific needs and provide you with quotes based on your unique circumstances.

Keep in mind that the cost of life insurance can vary significantly from person to person, so it’s essential to shop around and choose a policy that fits your budget and provides the coverage you need.

How Does Life Insurance Work?


Life insurance functions by offering a death benefit in return for the payment of premiums. A widely favored form of life insurance, known as term life insurance, is limited to a specific duration, such as 10 or 20 years. On the other hand, permanent life insurance provides a death benefit throughout the policyholder’s lifetime, as long as the premiums are duly paid.


Qualifying for Life Insurance?


Qualifying for life insurance involves a series of steps and considerations that insurers use to assess your eligibility and determine the terms of your policy. Here are some key factors that insurance companies typically consider:



Your age is an important factor in determining your eligibility and the cost of your life insurance policy. Generally, younger individuals tend to qualify for lower premiums because they are considered lower risk.



Your overall health plays a significant role in determining your eligibility and premium rates. Insurers may require you to undergo a medical exam and ask you about your medical history. Pre-existing medical conditions or high-risk behaviors (e.g., smoking) may lead to higher premiums or even denial of coverage.



Insurers will inquire about your lifestyle choices, such as smoking, drinking, or engaging in high-risk activities. These factors can affect your eligibility and premium rates.


4.Coverage Amount


The amount of coverage you seek can impact your eligibility. Some policies may have minimum and maximum coverage limits, and your income may also affect the amount of coverage you can qualify for.


5.Financial Stability


Some policies, especially those with high coverage amounts, may require you to demonstrate financial stability or insurable interest. This ensures that you have a legitimate need for the coverage.




Certain high-risk occupations (e.g., firefighters, and pilots) may result in higher premiums or require specialized policies due to the nature of the work.


7.Family Medical History


Some insurers may consider your family’s medical history when assessing your risk profile.


8.Medical Exam


Depending on the type of policy and coverage amount, you may need to undergo a medical examination. The results of this exam will be used to determine your health status and risk level.


9.Application Accuracy


It’s crucial to provide accurate information on your application. Misrepresenting your health, lifestyle, or other relevant details can lead to denial of coverage or cancellation of your policy.




Insurance companies use underwriting to assess your risk and set premium rates. The underwriting process involves evaluating all the information provided in your application and, if necessary, conducting further investigations.

Remember that there are various types of life insurance, including term life, whole life, universal life, and others. Each type has its own eligibility requirements and considerations. To find the best life insurance policy for your needs, it’s advisable to shop around, compare quotes from different insurers, and work with a licensed insurance agent or broker who can guide you through the process.

Your eligibility and premium rates will vary depending on your unique circumstances and the insurance company you choose.


Term vs. Permanent Life Insurance?


Term life insurance and permanent life insurance differ in various ways, but term life insurance is often the preferred choice for individuals seeking affordable life insurance coverage. Term life insurance provides coverage for a specific period and pays a death benefit if the policyholder passes away before the term expires.

On the other hand, permanent life insurance remains in effect as long as the policyholder continues to pay the premium. Another notable distinction is that term life insurance generally has lower premiums compared to permanent life insurance because it does not accumulate cash value.

Before applying for life insurance, it is essential to assess your financial situation and determine the amount of money needed to maintain your beneficiaries’ standard of living or fulfill the specific needs for which you are purchasing a policy. Additionally, you should consider the duration for which you require coverage.

For instance, if you are the primary caregiver for children aged 2 and 4, it is advisable to secure enough insurance to cover your custodial responsibilities until your children reach adulthood and become self-supporting.

You may want to research the costs associated with hiring a nanny, or housekeeper, or utilizing commercial childcare and cleaning services. Additionally, allocate funds for education expenses. In your life insurance calculation, include any outstanding mortgage and retirement needs for your spouse, particularly if they earn significantly less or are a stay-at-home parent.

Calculate the total expenses over approximately 16 years, accounting for inflation. This sum represents the death benefit that you might consider purchasing if it aligns with your financial means.

Know Why You’re Buying Life Insurance?


If you are considering purchasing a life insurance policy for someone in your family, it is crucial to determine what exactly you are looking to insure. Children and seniors typically do not have substantial income that needs to be replaced, but it may be necessary to cover burial expenses in the event of their death.

Additionally, parents may wish to secure their child’s future insurability by obtaining a moderate-sized policy while they are young. This enables parents to ensure that their child can financially protect their own future family. However, it’s important to note that parents can only purchase life insurance for their children up to 25% of the insurance policy on their own lives.

Is it possible to achieve a higher return on investment over time by investing the money that would otherwise be paid in premiums for permanent insurance? In certain situations where a significant income does not need to be replaced or if policy investment returns on cash value are excessively conservative, consistent saving and investing, such as self-insuring, might be a more sensible approach as a safeguard against uncertainty.

What Are the Benefits of Life Insurance?


Payouts received from life insurance policies are exempt from taxation. These death benefits are disbursed as a lump sum and are not subject to federal income tax since they are not considered as income for the recipients.

Dependents need not be concerned about their day-to-day living expenses. Calculations carried out by most policy estimators suggest that a multiple of your gross income, ranging from seven to ten years, should be acquired to cover significant expenditures such as mortgages and college tuition. This ensures that the surviving spouse or children are not obliged to resort to loans.

Arrangements can be made to cover final expenses. Funeral costs can be substantial, but they can be mitigated with the help of a burial policy or through the utilization of standard term or permanent life insurance policies.


In addition to their death benefits, life insurance policies can serve as an advantageous supplement to retirement savings. Permanent life policies, including whole life, universal life, and variable life insurance, possess a cash value component that can enhance other savings during retirement. 

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