Types of Life Insurance

Types of Life Insurance

Your First Choice Options:  Term and Permanent

Companies provide a variety of types of life insurance to meet individual needs. Your first choice is between term life insurance and permanent life insurance. Get to know the specifics about this choice here. Or skip right to a quick comparison of term vs. permanent and the differences among the main permanent policies.

Term Life Insurance

Term life insurance is the simplest and usually the least expensive choice. You pay a premium that goes toward your death benefit and pays the operating costs and profits of the company.

• A term life insurance policy covers you for a designated period of time.
• For term life insurance, the stated policy limit, or face value of the policy, is the total death benefit, the money paid to beneficiaries in the event of death. For example, if you buy a policy with a face value of $300,000, the money paid to your family upon your death will be $300,000.
• Term life insurance policies do not allow part of the premium to be invested on behalf of the holder, so there is no additional cash value to the policy.
• No benefits or cash are normally paid out if the holder outlives the policy.
• However, a newer more costly term life insurance called return of premium, or ROP, returns all the premiums to the holder should he/she survive the length of the policy.

Most of today’s term life insurance policies are level payment plans, in which you pay the same premium over a certain number of years, such as 1, 5, 10, 20, or 30. Other policies may have increasing or decreasing premiums. Some policies may guarantee renewal or allow you to change to a permanent policy.

Types of Permanent Life Insurance

Permanent life insurance is generally more expensive than term life insurance, but permanent life insurance policies have an added cash-value account.  The premium you pay is used in three ways:  toward your death benefit, for the operating costs and profits of the company, and to add to the policy’s cash value.

The part of your premium that adds to the cash value is invested. This money and the tax-deferred dividends or interest it earns are kept in an account called a cash-value account. The total money in the cash-value account increases over time as you pay premiums and earn dividends/interest.

Four major types of permanent life insurance are detailed below.

All four types

• are meant to last for a lifetime,
• have a death benefit, and
• have a cash-value.

Whole Life Insurance—the Most Basic Cash-Value Life Insurance

• Whole life includes a guaranteed low-risk cash-value account.
• The account is managed by the insurance company, and the investment details are usually not shared with the holder.
• There is a fixed death benefit.
• The beneficiary may also receive the balance of the cash-value account, depending on your policy.
• The amount of the premium is usually fixed and inflexible, but the amount that goes toward insurance increases over time, leaving less money to go toward the cash value.
• If you choose a participating plan, you may receive interest or dividends from your policy and use them toward your insurance premium payments.
• You can borrow and withdraw funds from your account.

Universal Life Insurance—a More Flexible Insurance than Whole Life

• Universal life includes a cash-value account with a minimum rate of return.
• You earn variable market rates of interest on your cash-value account.
• The account is managed by the insurance company, but the investment details are shared with the holder.
• You cannot invest in separate accounts such as stocks or money market accounts, nor divide your money between accounts.
• Premiums are variable, so you can pay them at any time and in any amount as long as you maintain a minimum payment level.
• You can decide how much of the premium is applied to increase the death benefit vs. to increase cash value. So the premium and the face value of the policy can be changed in response to changing needs, and the insurance company allows you to see how much is being applied toward insurance and how much toward cash value.
• You can use investment earnings to help pay premiums.
• You can borrow or withdraw funds from the policy.

Variable Life Insurance—a More Risk-Oriented Plan

• Variable life has a cash-value account with more flexible rules.
• You can choose to invest in various accounts offered by the insurance company, such as low-risk fixed income funds or high-yield stocks and bonds, but returns are not guaranteed.
• The value of the cash-value account is not guaranteed during your lifetime.
• The death benefit can vary based on the changing value of the cash-value account, however most policies guarantee a minimum death benefit.
• Premiums are usually fixed, but may increase if your investments do poorly.
• You can use investment earnings to help pay premiums.
• You may borrow from the policy during your lifetime.

Universal Variable or Variable Universal Life Insurance—Part Variable, Part Universal

• You can have separate accounts in which to invest your money, such as stocks and money market accounts, as in Variable plans.
• The decision of which accounts you invest in will be yours, and you will gain or lose money based on how well your choices do, as in Variable plans.
• Your premiums are flexible but must be large enough to cover your base insurance and your investments, as in Universal plans.
• The death benefit is also flexible, as in Universal plans.
• You can borrow or withdraw funds from the policy during your lifetime.
• However, if you terminate the insurance early, you may not receive the full value of your cash-value account.