What Are the Basic Types
of Life Insurance?
Seventy-five
percent of U.S. households agree
that life insurance is the best
way to protect against the
financial consequences of a
primary wage earner’s premature
death.1 However,
choosing from the many types of
life insurance policies that are
available can be a difficult
process. A few main categories
are described below to help you
search for a life insurance
policy that is appropriate for
you.
Term Life
Insurance
Term life
insurance is the most basic and
usually the most affordable.
Policies can be purchased for a
specified period of time. If you
die within the time period
defined in your policy, the
insurance company will pay your
beneficiaries the face value of
your policy.
Policies can
usually be bought for one- to
30-year time spans. Annual
renewable term insurance usually
can be renewed every year
without proof of insurability,
but the premium may increase
with each renewal. Term
insurance is useful if you can
afford only a low-cost option or
you need life insurance only for
a certain amount of time (such
as until your children graduate
from college).
Permanent
Life Insurance
The other major
category is permanent life
insurance. You pay a premium for
as long as you live, and a death
benefit will be paid to your
beneficiaries upon your death.
Permanent life insurance
typically comes with a “cash
value” savings element. There
are three main types of
permanent life insurance: whole,
universal, and variable.
Whole
life insurance.This
type of permanent life insurance
has a premium that stays the
same throughout the life of the
policy. Although the premiums
may seem higher than the risk of
death in the early years, these
“overpayments” can accumulate
cash value and are invested in
the company’s general investment
portfolio. You may be able to
borrow funds from the cash value
or surrender your policy for its
face value if necessary. Of
course, loans and withdrawals
will reduce the policy’s death
benefit.
Universal life insurance.Universal
life coverage goes one step
further. You have the same type
of coverage and cash value as
you would with whole life, but
with greater flexibility. Once
money has accumulated in your
cash-value account, you may be
able to vary the frequency, as
well as the amount, of your
premiums. In fact, it may be
possible to structure the policy
so that the invested cash value
eventually covers your premium
costs completely. Of course,
it’s important to remember that
altering your premiums may
decrease the value of the death
benefit.
Variable life insurance.With
variable life insurance, you
receive the same death
protection as with other types
of permanent life insurance, but
you are given control over how
your cash value is invested. You
have the option of investing
your cash value in stocks,
bonds, or money market funds.
The value of your policy has the
potential to grow more quickly,
but there is also more risk. If
your investments do not perform
well, your cash value and the
death benefit may decrease.
However, some policies provide a
guarantee that your death
benefit will not fall below a
certain level. The premiums for
this type of insurance are fixed
and you cannot change them in
relation to the size of your
cash-value account. Any
guarantees are contingent on the
claims-paying ability of the
issuing company.
Variable universal life
is another type of variable life
insurance. It combines the
features of variable and
universal life insurance, giving
you the investment options as
well as the ability to adjust
your premiums and death benefit.
As with most
financial decisions, there are
expenses associated with life
insurance. Policies commonly
have mortality and expense
charges. In addition, if a
policy is surrendered
prematurely, there may be
surrender charges and income tax
implications. The cost and
availability of life insurance
depend on factors such as age,
health, and the type and amount
of insurance purchased.
When selecting a
life insurance policy, make sure
to examine all your options, as
well as the positives and
negatives of each type, in order
to choose a policy that suits
your needs. If you are
considering purchasing life
insurance, consult a
professional to explore all your
options.
Source: 1) LIMRA
International, 2006