What Are the Different Types of Life Insurance?

Colin Grubb, May 13, 2016
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Term Vs. Whole

All life insurance falls under two basic categories, term life and whole life. Term life covers you for a set period of time while whole life, also called permanent, covers you regardless of when you die. Both kinds have several subclassifications.

When you throw in customized riders (additional a la carte benefits at additional cost), and standard individual policy features that differ from company to company, you get a dizzying array of possibilities. Just remember that everything is built upon these two basic kinds of coverage.
 

Term Life

Term life covers you for a predetermined period of time (10,20,30 years, etc.). This is the type of life insurance that is specifically geared toward providing for your loved ones in the event of your untimely death. People who buy term life usually choose a span of time that would cover the family until the children are expected to be out of school and financially independent. They choose an amount of coverage that would cover mortgage, debts and replace their income for a period of time (many of the companies we review offer handy coverage calculators so you can figure what it will take to do this.

Of the two types of insurance, term is the cheaper premium wise.

Term is further divided into level term and decreasing term. Level term pays out the same amount regardless of when the insured dies within the term. Decreasing term’s death payout decreases as the policy ages. Hardly anyone buys decreasing term these days.

Some term policies are renewable, and some are convertible to permanent.  Some offer a return of premium option which will return the money you’ve put in at the end of the term. But, as you might have guessed, these types of policies have higher premiums.

Companies generally will not insure a term that lasts beyond your 80th birthday. Your premium will be dependent upon your age and health when you purchase the policy.

 

Whole Life

Whole Life pays out no matter what age you live to. Monthly premiums are fixed and generally a lot higher. To ensure premiums remain in place companies generally inflate the premium payment in earlier years to compensate should the policyholder live a long life.  As your cash value increases, you have the option to borrow against it, surrender the policy for a payout, or collect dividends on it.

There are also several types of whole life.

Universal
With this type of policy you can move money between the insurance and savings components. It allows the flexibility of being able to use the savings component to pay the premium in the event the return on the savings is small at a given time, or the insured has run into financial difficulty.

Variable
This type allows the insured to allocate a portion of their policy dollars for investments. The money you earn is not taxed until payout.

Variable Universal 
The same as variable but with universals customary feature of being able to adjust premiums.

So there it is. Term means a set span of time that you possibly can renew, while whole is forever and builds cash value. All the other permutations of whole are essentially defined by what you are allowed to do with that cash value.

 

If you're ready to buy life insurance, take a look at industry leader SelectQuote Life. The company offers both term and whole policies from all of the leading players in the industry. (Full disclosure we partner with SelectQuote Life and receive a small referral fee if you choose to do business with them.)

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