Most people know that life insurance is something that allows a spouse or other beneficiaries to be paid a sum of money (called the death benefit) upon the death of someone covered by life insurance. Fewer people know about the different types of life insurance, the features, and the versatility of the different types.
In short, there are two types of life insurance: Term insurance and permanent insurance.
Term Life Insurance – Term life insurance is designed to cover a person for a specific number of years, during which the policy owner pays the same premium in exchange for coverage. When the length of the term ends, the policy owner is typically placed into a different rating category for the next term, which usually means a change in premium. Term policies are strictly protection policies, meaning that the only benefit comes from specified event, for which a sum of money is paid to a beneficiary. Term insurance is typically very inexpensive and well-suited for young people and those without dependents or children, although term insurance does not build up any cash value.
Permanent Life Insurance – There are several different types of permanent life insurance, but the main types are whole life, universal life, and variable versions of the two. One of the great things about permanent life insurance policies is that, unlike term policies, they can actually build up cash value. You can borrow against this cash value after it has accumulated a certain amount. Permanent policies can also carry an investment aspect to them, meaning that in addition to the protection aspect of a term policy, they also serve as a cash accumulation vehicle that facilitates the growth of capital. Below is an overview of several of these types of permanent policies.
- Whole Life Policies – Whole life insurance tends to be the most expensive of the three primary types of life insurance (term, whole life, and universal life), but the advantages are that the death benefit, rate of cash value growth, and the fixed premium are all guaranteed. Whole life policies have less of a risk of lapsing because much like term policies, the owner has to make regular premium payments to keep the policy active.
- Universal Life Policies – Universal life insurance is the most flexible of between term, whole life, and universal life policies. What makes it so flexible is that there is regular schedule of payments and the growth rate of the cash value is not fixed. To keep the policy active, the owner must monitor the amount of cash value accumulated and make sure that there is an adequate amount to meet the charges and demands of the insurer. Universal life policies are typically more expensive than term policies, but less expensive than whole life policies.
- Variable Life Policies – Variable life insurance policies have cash value that accrues interest at variable rate that depends on where the owner decides to invest the cash value. The policy owner has the option to invest the cash value as he or she sees fit. Variable universal life tends to be a better cash accumulation vehicle than variable whole life because variable whole life policies have fixed investment and premium schedules.
While term and permanent policies have many differences, there are two things that term policies and permanent policies have in common:
- Both term and permanent policies protect your family and loved ones in the event of your passing, by replacing some or all of your lost income and preventing financial hardship.
- Both term and permanent policies are a great way to leave an estate for your children and loved ones because the death benefit is typically far greater than the amount of the premiums paid.