What are the Types of Life Insurance?
There are two major types of life insurance:
Whole Life
Whole life, sometimes called permanent insurance, provides protection (death benefit) for your dependents while building a cash-value-account. These kinds of policies pays a death benefit to named beneficiary and offers you a low risk cash value account and tax-deferred cash accumulation. They provide a fixed premium, which can’t increase during your lifetime as long as you continue to pay the planned amount.
During this time the insurance company manages the policies various investment accounts. These accounts can pay dividends directly to the insured or be re-invested in the policy to reducing payments. Which means that at some point the policy could pay for itself. Additionally, whole life policies allow the owner to withdraw from the policy during their lifetime.
Please note that the cost per $1,000 of benefit increases as the insured person ages, which could become very high later in life. As a result some insurance providers will sometime change a higher premium in earlier years, investing the overage, using the gains to supplement premium levels later in life.
By law, when these "overpayments" reach a certain amount, the cash value must be available to the policy owner if he or she decides not to continue with the original plan. Which makes this life insurance policy a kind of tax-deferred long-term savings account for you and your beneficiaries.
Whole life insurance encompasses several subcategories, including 3 other subcategories: variable life, universal life and universal variable life.
Variable Whole life insurance - Provides all the benefits of whole life insurance, but allows you to vary the death benefit in relation to the fund returns of the cash value account.
Universal life insurance - Allows you to earn market rates of interest on your cash value account.
Universal Variable life insurance - Allows separate accounts for you to invest in such as money market, stock, and bond funds, while offering premium flexibility.
Term Life
Term life insurance is the simplest form of life insurance. It pays death benefit only if death occurs during the term of the policy, which is usually from 1 to 30 years. Most term policies have no other benefit provisions, like withdrawals, investment accounts or cash accounts. However, term premiums are significantly lower than whole life.
There are two basic types of term life insurance policies, level term and decreasing term. "Level term" means that the death benefit stays the same throughout the duration of the policy. While "Decreasing term" means that the death benefit drops, usually in one-year increments, over the course of the policy’s term.
