Introduction
Life insurance refers to a contract between the policy owner and an insurance company. In the most basic terms, the policyholder pays premiums to the insurance company, and in return, their beneficiaries receive a (nearly always tax-free) death benefit upon the policyholder’s death. In this article, we will provide an overview of the key types of life insurance.
Major Types of Life Insurance
Term life
Term life insurance provides coverage for a certain period, typically 10, 20, or 30 years. It provides a death benefit to the listed beneficiaries if the insured dies within the stated period. At the end of the term, the policyholder may renew it or possibly convert it into a permanent policy. However, most simply allow the term life insurance policy to expire. This kind of policy is ideal for those who have temporary needs for insurance. For example, someone who is in the accumulation phase of life and believes he or she will have sufficient assets to provide for family needs would consider obtaining a term life policy.
Whole life
Whole life insurance remains the most purchased type of life insurance in the United States. It provides coverage that can last for essentially one’s entire lifetime. As with all life insurance, the designated beneficiaries receive money from the insurance company upon the death of the insured. Another benefit of whole life insurance is that it can also be structured to include a savings element known as the “cash value.” Part of your fixed annual premium buys insurance, and the remainder goes into a reserve account that earns interest and grows in value over time. For that reason, whole life insurance can be a good choice to consider for long-term financial planning for certain people. For the same reason, whole life insurance is more expensive than term life insurance.
Universal life
Universal life insurance offers a more flexible approach than whole life. It allows policyholders to adjust their premiums and death benefits, making it adaptable to changing financial circumstances. Payments to a universal life insurance plan are also partially directed into an investment account, where any accrued interest is credited towards the cash value. As with whole life, premiums are more expensive than for a comparable term life policy.
Variable (universal) life
Variable life and variable universal life insurance are additional types of permanent life insurance policies. The big distinguishing factor is that they allow investment options like stocks, bonds, and mutual funds. These policies are also regulated as securities contracts and offer potential cash value growth through market-linked investments. Policyholders can adjust premiums (in the case of variable universal life) and can allocate funds to sub-accounts for better returns, but they bear all the investment risks as cash value and death benefits may fluctuate with market performance. These policies are even more expensive than whole and universal life due to additional administrative costs.