Life insurance is a contract between a policy owner and an insurance company, where the insured party pays a premium to the insurer in return for the promise of a sum of money at the time of death or serious injury. Because there are a number of different types of life insurance on the market, it can often be difficult for consumers to track down the perfect product for their needs. The easiest way to categorise life insurance policies is whether they are protective or investment related in nature, as this is quite a clear cut and accurate description.
Protection based life insurance policies are designed to be of benefit at the time of death or serious injury, whereas investment related policies are designed to accumulate value through the facilitation of the growth of capital over time. This distinction between protection policies and investment policies is simple and needs to be understood by anyone wishing to take out a life insurance contract.
One of the most common forms of protective life insurance is known as term insurance, a temporary life insurance policy that provides cover for a specified period of time. Term life insurance can not be used for investment purposes, as this type of policy does not accumulate a cash value. In this sense, like all forms of protective life insurance, term insurance is a ‘pure’ insurance which can never be cashed out and therefore never used as an investment. Term life insurance differs from most permanent life policies, which have both a protective and an investment related focus. While investment insurance may also have a protective action, the primary objective of investment contracts is the facilitation of capital growth for the insured party.
There are a wide range of investment life insurance policies, with common forms including whole life insurance, universal life insurance, and variable life insurance. All of these forms of life insurance are permanent in nature, and remain in force until they are either payed out or expire. In a permanent investment related life contract, the insured person is generally able to access the cash value of their policy, through withdrawal, lending, or policy surrender. Whole life coverage provides a guaranteed death benefit value, while still generating a cash value during the life time of the insured party. Universal life coverage is different again, although it is still an investment related form of life insurance. Universal life coverage also provides a permanent form of insurance, although with more flexible premium rates and the chance of a higher rate of return. While there are many different kinds of life insurance on the market, an understanding of the differences between investment and protection policies is the first step when researching any life insurance contract.