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What are the different types of life insurance available?

There are many kinds of insurance, but they generally fall into two categories: term insurance and permanent insurance.

Term insurance provides protection for a specific period of time. It pays a benefit only if you die during the term. Some term insurance policies can be renewed when you reach the end of the term, which can be from one to 30 years. The premium rates increase at each renewal date. Many policies require that you present evidence of insurability at renewal to qualify for the lower rates.

Permanent insurance provides lifelong protection. As long as you pay the premiums, the death benefit will be paid. These policies are designed and priced for you to keep over a long period of time. If you don’t intend to keep the policy for the long term, this may not be the best type of insurance for you.

Permanent policies are known by a variety of names: whole, ordinary, universal, adjustable and variable life. Most have a feature known as “cash value” or “cash surrender value.” This feature, not found in most term insurance policies, provides you with some options. You can cancel or “surrender” the policy — in total or in part — and receive the cash value as a lump sum. If you surrender your policy in the early years, there may be little or no cash value. If you need to stop paying premiums, you can use the cash value to continue your current insurance protection for a specified time or to provide a lesser amount of protection covering you for your lifetime.

You can usually borrow from the insurance company, using the cash value in your life insurance as collateral. Unlike loans from most financial institutions, the loan is not dependent on credit checks or other restrictions. You ultimately must repay any loan with interest or your beneficiaries will receive a reduced death benefit.

With all types of permanent policies, the cash value of a policy is different from the policy’s face amount. The face amount is the money that will be paid at death or policy maturity. Cash value is the amount available if you surrender a policy before its maturity or your death. Moreover, the cash value may be affected by your insurance company’s financial results or “experience,” which can be influenced by mortality rates, expenses, and investment earnings.