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Understanding the various types of insurance policies

Life insurances are legal contracts between a policyholder (insurance buyer) and an insurer (insurance provider company) where the policyholder will be required to pay certain periodic payments (premiums) so that the insurer pays him a definite amount as specified in the contract in the occurrence of an insured event (typically death). However, the policy buyer (who makes the payment of the premiums) and the beneficiary (insured) who would receive the benefit out of a life insurance plan need not necessarily be the same person. You can buy a policy (policy owner or guarantor) which will pay yourself or your dependents or someone else whom you have specified as a nominee in the contract. There will be certain exclusions for insurance coverage that are often written to limit the liability of the insurer in case of claims related to suicide, fraud, war, riot, civil commotions, etc. For all people staying in the US, including US citizens, green card holders, work visa holders (H1, H4 or L1, L2 visa), international students living in the US, etc. are required to have a social security number or an ITIN number in order to apply for a life insurance policy. Life insurances can be broadly divided into two categories:

Protection policies
These policies are purely designed in a way to provide a benefit in the form of a lump sum payment in the event of a specified occurrence. The most common form of a protection policy is term insurance in the recent years. Term insurances plans are protection policies for death. A large monetary benefit is fixed for a particular “term” which is typically one or more years. This amount will be immediately paid to whomever you have mentioned as the beneficiary in the contract only if you die within that period or term. While certain term insurance policies allow you to renew the policy for few more additional terms, there are few other policies that can be converted from a term insurance to an investment type of policy within the expiry of the conversion period. However, premiums for the new policy will be higher than the original term insurance policy in either case. Hence, it is important to check the cost of premiums for policies bought at older ages and the length of time that you can continue with the policy.

Investment policies
These policies are designed such that along with providing monetary protection upon death, it also facilitates the growth of the money which is invested in the form of regular or single premiums. Hence, these are commonly called cash-value policies. The most common forms of these policies include whole life insurance, universal life insurance, variable life insurance and endowment policies.
Whole life insurance: There are two components in these plans—one that gives you a predetermined benefit upon death and the second one that lets your money accumulate cash against which you can borrow a loan. If any money is owed where the insurance amount is used as a collateral, this debt amount will be deducted from the benefits received at the time of maturity.

Straight life or ordinary life insurance: This required you to pay a fixed premium amount for your entire lifetime. Although the premium costs seem higher than an initial payment of a term insurance, it is much cheaper compared to the costs paid with respect to the renewal of a term insurance.

Non-forfeiture life insurances: The premiums paid towards these policies are for shorter periods like a fixed term of 20 years or until certain age cap. This means that you can make the payments towards the premiums while you are still earning; moreover, the cash value earned out of it can be available even after the payments have stopped, unlike in the case of term insurance. The cash earned can be withdrawn at any time or used to buy another policy.

Universal life insurance: Similar to a term insurance, this provides a low-cost protection against death and similar to whole life insurances, this provides a factor of cash value for the invested amount to grow. However, what differs this policy type from the rest is the fact that the amount earned in this plan can be utilized to pay the premiums of the same policy.

Variable life insurance: Along with providing a death protection, this policy allows the owner to invest a portion of the premium amount into another account which will then be used to buy various funds from the same insurance company. The funds can be in the form of stocks, equities, bonds, etc.

Endowment insurance: Here, the policy owner can choose how much he wants to pay toward his monthly payments and when he wants his the policy to mature. The guaranteed amount for the final payout is decided based on the monthly payments which are known as an endowment. This endowment can be typically used for funding your child’s education. In case, you die before the maturity date, the amount will be paid to whomever you have nominated as the beneficiary.

With several fancy names used by different insurance companies for their products, it is easy to get confused. However, one should be aware that all life insurance policies are based on one or more of the three basic types mentioned above. Choose the most suitable one based on the various costs involved such that it meets your budget and eligibility.

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