All life insurance falls under two basic categories, term life and permanent life. Term life covers you for a set period of time, while permanent life covers you regardless of when you die. Both types have several subcategories.
According to the Insurance Information Institute, in 2016, consumers purchased approximately 4.3 million term individual life insurance policies and about 4.6 million whole life ones.
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.
Bear in mind that life insurance products for groups are different from life insurance sold to individuals. The information that we gathered here focuses on life insurance sold to individuals.
Term Life Insurance
As the name suggests, term life covers you for a predetermined period of time—commonly 10, 20, or 30 years. For this reason, it is also called “temporary” insurance.
The yearly renewable term is no longer a top seller. The most popular type is now a 20-year term.
If death occurs during the term, the policy pays cash benefits to the beneficiary. However, once the term is over, and if the coverage is not renewed, the policy ceases.
Of the two main types of insurance, term is less expensive premium-wise.
This type of life insurance is specifically geared toward providing for your loved ones in the event of an untimely death.
People who buy term life usually select a timespan that will cover the family until such time as the children are out of school and financially independent.
The term that is right for you depends on the ages of your children, the number of years before you retire, and other factors.
Additional considerations may include mortgage payments, debts, and income replacement.
There are several types of term policies available, so we recommend that you consider the facts about each type before you choose term life over whole life insurance.
Guaranteed level term is the most common type of term life insurance. This policy is defined by yearly premiums that never increase during the life of the policy. Level term insurance policies pay out the same amount regardless of when the insured dies, within the confines of the term (for the most part 10, 20, or 30 years). Bear in mind that the premiums will be higher each year for longer term policies.
Annual renewable term is the simplest form of term life insurance. With this policy, the beneficiary is paid by the insurance company if the insured died during the one-year term. After that year is up, it’s renewable for a certain number of years (outlined in the policy).
Decreasing term is a policy designed to decrease the payout as the policy ages. In other words, the death benefit decreases throughout the period of the plan. Some term policies are renewable, and some can be converted into a permanent policy.
Return of premium option is a type of term insurance that will return the invested funds at the conclusion of the term. These policies are available in 15, 20, or 30-year terms. Unfortunately, these types of policies have higher premiums.
Modified term is a life insurance policy where the premiums usually start lower than they normally would be and stay that way for a period of three to five years and then increase over time.
A policy's monthly premium is calculated at the time of purchase and is dependent upon one's age and health at that time. Generally speaking, however, companies will not insure a term that lasts beyond the policy holder's eightieth birthday.
Permanent Life Insurance
Permanent life insurance is an umbrella term for life insurance plans that do not expire. This type of life insurance pays out even if you live to be a hundred and thirty years old. However, monthly premiums are fixed and are usually a lot higher.
Permanent life insurance has an investment-like cash value component that can grow over time. As your cash value increases, you have the option to borrow against it, surrender the policy for a payout, or collect dividends on it.
In other words, a permanent life policy is typically comprised of two parts:
- a savings or investment portion
- an insurance portion
To ensure that premiums remain in place, companies generally inflate the premium costs in earlier years. This is done in order to compensate for the possibility of a long-lived policyholder.
The two primary types of permanent life insurance are whole life and universal.
Whole Life Insurance
Whole life insurance offers coverage for the full lifetime of the insured. This type of policy gives you life insurance coverage with a savings feature. As a result, you may end up paying higher premiums in the beginning.
With this policy, your insurance company puts part of your insurance money in a high-interest bank account, and with every premium payment your cash value increases.
You can also participate in your insurance company’s surplus and receive dividends annually.
Whole life insurance is best for people who are young and can afford to pay it over the long term.
Universal Life Insurance
Universal life insurance is also called “adjustable life insurance” because it gives consumers flexibility in their policy’s premium payments, death benefits, and savings elements.
With universal life insurance, a policyholder can transfer money between the insurance and savings components. It gives the flexibility of being able to use savings 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.
Also, you have the liberty to reduce or increase your death benefit and the face value of your insurance coverage, but you need to pass a medical examination to qualify for this benefit.
There are two variants of universal life:
- Indexed Universal
- Variable Universal
Indexed Universal
Indexed Universal policies allow the insured to divert funds into equity index accounts. Put simply, this allows policyholders to allocate a portion of their policy dollars for investments. The money earned is not taxed until the payout.
Variable Universal
Variable Universal life insurance policies generate a cash value that increases over time, which is meant to be invested. Through this investment component, this type of permanent life insurance functions similarly to a mutual fund.
Other types of permanent life insurance are:
Survivorship
As opposed to other life insurance variants, survivorship policies cover two individuals within one monthly premium payment. Upon the death of the first policyholder, however, no benefit is paid.
These aren’t disbursed until the second policyholder is deceased. This option is geared toward married couples.
Guaranteed Acceptance
Guaranteed Acceptance life insurance is a policy type that helps consumers to cover their final expenses without requiring a medical exam. This variant of permanent life insurance is great for those with pre-existing conditions.
Summing up, where term life insurance only offers coverage over a set span of time, permanent life insurance is forever and builds cash value. All the permutations of permanent life insurance policies are defined by what you’re allowed to do with that cash value.
For more information, our top 10 life insurance providers would be more than happy to assist.