What Types of Life Insurance are there?

There are four basic types of life insurance from which you can choose and it is important that you understand what the various types of life insurance are and what they entail before you consider purchasing a policy.

The four basic types of life insurance include:

• Term Life Insurance
• Whole Life Insurance
• Universal Life Insurance
• Variable Life Insurance

Term Life Insurance

Term life insurance is the simplest and least expensive type of life policy. It is a pure life insurance policy with no cash value account. This means that this type of policy has only one function and that is to pay a specific lump sum to a beneficiary upon a specific event, such as your death. This type of life insurance policy protects your family by providing them with money to cover expenses after your death.

There are various types of Term life insurance which include:

• Level Term – This refers to a fixed amount of coverage with premiums that are fixed over a certain period of time. This fixed period of time is usually in 10-year increments.
• Increasing/Decreasing Term – The amount of coverage increases or decreases throughout the term and the premiums typically remain level.
• Renewable Term – This type of life insurance includes a renewal provision that gives the policy owner the right to renew the insurance coverage at the end of the specified term without submitting evidence of insurability. Since the price of the policy and premiums may go up as you get older, you may want to avoid the annually renewable term life policy in favor of something like a guaranteed level term life insurance policy where the policy stays the same price for a specific time period of time that can range from 5 to 30 years depending on what you have chosen.
• Convertible Term – This gives the policy owner the right to convert the term policy to a permanent policy.
• Group Term – This type of term life insurance is purchased typically by an employer or professional association that is intended to cover several people. This usually results in reduced premiums.
• Return of Premium (ROP) – This is the newest type of term life insurance and it pays out the value to you at the end of the term if you are still living. If you die during the term then the funds go to your beneficiary.

Whole Life Insurance

Whole life insurance covers you for your entire life rather than for only a specific term. A whole life policy will usually cost more on average and have higher premiums than term life policies, however, the investment potential and lifelong coverage may be beneficial because this type of policy provides permanent protection for your dependents while also building a cash value account. With this type of insurance, the insurance company manages the policies various accounts and invests a portion of your premiums.

Benefits of Whole Life Insurance

• This type of policy pays a death benefit to your beneficiary and also offers you a low risk cash value account and tax-deferred cash accumulation.
• It provides you with a fixed premium which cannot increase during your lifetime as long as you continue to pay the planned amount.
• It allows the insurance company to exclusively manage the cash value account in your policy.
• It provides you with the option to receive dividends from your policy or to apply them to reduce payments.
• It offers you the right to withdraw from the policy during your lifetime.

Shortcomings of Whole Life Insurance

• This type of policy does not offer the account flexibility to invest in separate accounts such as money market, stocks, and bond funds.
• It does not allow you the account flexibility to split your money among different accounts or to move your money between accounts.
• It does not offer premium flexibility so you will be required to pay the same fixed premium amount.
• It does not offer face amount flexibility.

Universal Life Insurance

With Universal life insurance, you decide how much you want to put in over and above a minimum premium. The insurance company then chooses where to invest this money and this investment is generally restricted to bonds and mortgages. The investment and the returns go into a cash-value account, which you can either use against premiums or allow to build up.

With some policies, the cash account goes toward the face value of the policy on the death of the policy owner. With a second variety, the beneficiary receives the face value of the policy plus all or most of the cash account.

Universal life insurance provides permanent protection for your dependents and is more flexible than whole or variable life. This type of policy allows you to earn market rates of interest on your cash value account and it also offers the right to borrow or withdraw from the policy during your lifetime. Premium flexibility and face amount flexibility are also permitted.

Drawbacks to this type of insurance include higher fees and interest rate sensitivity. Universal policies include up-front fees as well as ongoing administrative fees totaling as high as 5% to 7% of your premiums. You may also find your premiums increasing when interest rates decline.

A subcategory of universal life insurance is universal variable life which lets customers choose what they want to invest in rather than the insurance company choosing for them. Universal Variable life is the type of insurance which gives you more control of your cash value account policy features than any other insurance type.

Variable Life Insurance

Variable life is another one of the main basic types of life insurance and with this type of policy, you have more investment opportunities, which include stocks. As with a universal policy, returns on investments can offset the cost of premiums or build up in your account. Depending on the type of policy, the beneficiaries will either receive the face value of the policy or the face value plus all or part of the cash account

Variable Life also generally offers fixed premiums and control over your policy’s cash value. Your cash value is invested in your choice of stock, bond, or money market funding options. Cash values and death benefits can rise and fall based on the performance of your investment choices.

Although death benefits usually have a floor, there is no guarantee on cash values. Fees for these policies may be higher than for universal life, and investment options can be volatile. The policy also stipulates that if you terminate the contract in early years you will receive less cash value total return than in a whole contract. On the plus side, capital gains and other investment earnings accrue tax deferred as long as the funds remain invested in the insurance contract and it allows you to make withdrawals or to borrow from the policy during your lifetime.

With a Variable life policy, it requires you, the policy owner, to devote time to manage the accounts. The policies long term success is contingent on the investment you make.

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