Types of Life Insurance

Term Life Insurance, Whole Life Insurance and Universal Life Insurance - What are they?

All about the types of life insurance

Kinds of Life Insurance

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What are the types of life insurance?
On a broad basis, life insurance breaks down into two general categories: Term life insurance and permanent life insurance. There are sub-sets of each.
Term life insurance is distinguished by being "pure insurance" i.e. no bells and whistles, just pay a premium and if you die during the "term" (period of time), your beneficiaries receive the insurance amount. Different lengths of time (terms) are available ranging from 1 year to 30 years. Since a 30 year term, for example, is really an average of 30 1 year "terms" it would be more expensive. Thus 10 year term would be less than 15 year etc. The problem with term life insurance is that it expires at the end of the term. Often it can be renewed but at rates reflecting one's age. So, a 10 year term bought at age 35 which can renew, would renew at rates for age 45. Eventually, it becomes unaffordable. One theory discussed by some financial advisors is to invest enough so one would replace their life insurance with investment principal and earnings later in life. This is sometimes called "buy term and invest the difference." The difference being the difference in cost between term and permanent (whole life or universal life) life insurance. One can check the market for term life insurance anonymously at LifeInsure.com
Term life insurance advantages: Very low cost while it's in effect (during its "term"). A young family can attain the most important purpose of life insurance - making sure one's family is taken care of financially in case of death.
Term life insurance disadvantages: Price becomes unaffordable at older ages. Loss of benefit to family when policy is dropped or expires. If "term and invest the difference" strategy is used and one doesn't invest then the term premium was wasted.
Permanent life insurance is a category that includes whole life insurance, universal life insurance and variable life insurance.
Whole life insurance is a guaranteed level premium policy for life. Typically it is sold by mutual life insurance companies (owned by the policyholders) and pays dividends which can increase the policy value and increase the insurance amount (death benefit). Since the premiums are level for life and the insurance company will absolutely pay a death benefit at some point, the premium outlay is substantially more than term in the early years. This is partially offset by the policy's cash values. Cash value of a life insurance policy has become a controversial and debated area but it's actually simple. The overpayment, minus the costs to the insurance company for acquiring the policy (to sales and distribution) basically goes to cash value plus interest. The growth in a Permanent life policy like whole life grows on a tax deferred basis.
Universal life insurance is a "flexible" version of permanent life insurance. It was developed in the 1980's when interest rates spiked up as an alternative to whole life and also allowed flexible premiums. The problem is that one can put too little money into a universal life policy (underfunding). A recent change in universal life allows for guarantees of the death benefit if one maintains certain premium payment levels.
Advantages of permanent life insurance (whole life and universal life): Level premiums for life. Death benefit can be guaranteed for life no matter how long you live. Cash values can be accessed. Growth of cash value is tax deferred.
Disadvantages of permanent life insurance include the much higher cash outlay in early years. This can make it an incorrect choice especially for a young family with children that can only afford the full amount of insurance needed by them by purchasing term.