Types of Life Insurance

The flexibility, standard and optional benefits associated with individual life insurance policies has greatly expanded in recent years. This is precisely why, even if you currently have life insurance, it may be beneficial to do an "insurance check-up" where a licensed insurance agent can review your needs and determine if your current life insurance plan is offering you all the benefits and coverage you might need and qualify for.

There are four (4) basic types of life insurance - Term, Whole-Life, Universal-Life, and Variable Universal-Life which are briefly described below. 

"Term insurance" is the most basic type of life insurance. It is referred to as a "term coverage" because, for a period of time usually lasting anywhere between one to thirty years - referred to as the "term of coverage" - you are purchasing insurance against the possibility of dying. If you die within this term, you receive the death benefit. If you die outside of this term, you receive nothing. The major upside of purchasing term coverage is its affordability. For a relatively low premium payment, you can access a very large death benefit. The major downside of purchasing term coverage is that the policy accrues no "cash value" meaning that there is no money available for such things as "policy loans" or "automatic premium payments." These definitions will be discussed in greater detail in my other articles dealing with life insurance benefits. Term insurance policies have changed in recent years with many offering very attractive standard and optional benefits that simply did not exist many years ago. You are strongly encouraged to discuss your needs with your independent insurance agent.

"Whole-Life insurance" pays a fixed death benefit for the remainder of the insured's life or a period specified by the policy owner and offers a fixed, level premium payment schedule with payments due either weekly, monthly, quarterly, or yearly until the policy "endows" - which is the age at which the policy is fully paid - historically at age 100 although, due to longer life expectancies, this age of endowment has been steadily creeping up for many life insurance policies to the age of 120. Premium payments for whole-life insurance policies are usually much higher than term life insurance policies and must be paid or the policy will lapse. In exchange, whole-life policies have cash value which can be borrowed against for such things as policy loans or automatic premium payments.

"Universal-Life insurance" enjoys many similarities with traditional whole-life insurance but offers the policy owner much greater flexibility in choosing such things as the amount of premium payments and the amount of death benefit. The policy owner may choose to pay more or less in premiums year by year depending on how much cash value is desired. A unique feature of a universal-life insurance policy is the ability of the policy owner to take cash withdrawals from the policy. A "cash withdrawal" is a type of loan (which can be tax-free depending on the policy owner's age and the amount taken) taken from the cash value of the universal-life insurance policy which reduces the death benefit of the policy, but does not have to be repaid by the policy owner prior to his or her death provided that the policy has sufficient premiums paid into it to cover the cost of insurance. The cash value associated with universal-life insurance policies tends to be grown in a more aggressive manner compared to traditional whole-life insurance - usually involving a mixture of mutual or equity-indexed stock and equity funds - but less aggressively compared to variable universal-life insurance products which are described below. Again, there have been significant changes in the arena of universal life insurance policies with an exciting array of standard and optional benefits that the insured can tap into. We invite you to discuss your needs with your independent insurance agent.

"Variable Universal-Life insurance" is a particular type of universal-life insurance policy that allows the cash value of the account to grow in a special account set up by the insurance company which is often tied into stocks and bond funds as well as exchange-traded funds. The policies can often grow the cash value of the account more aggressively and amass larger returns over the life of the policy. However, these types of life insurance policies can also lose money resulting in the policy owner needing to pay a larger premium payment in order to cover the cost of insurance. Clearly, these types of life insurance policies are for individuals who can tolerate risk and are only sold by agents licensed not only to sell life insurance but also to sell securities.

Now that you understand the four basic types of life insurance policies, you are encouraged to learn about some of the standard and unique benefits offered by these plans.