Types of Life Insurance: What are the main ones?

Types of Life Insurance: What are the main ones?

Life insurance can be an essential part of budgeting and planning. When looking for insurance, you can find several products that fall into two main categories: term life insurance and permanent life insurance (also known as whole life insurance). Understanding the fundamental differences between these two main types of insurance can help you decide on the insurance that best suits your needs and goals.

Note that group insurance products, policies that cover a group of people under a single policy (such as policies offered by an employer), may differ from policies sold to individuals. The following information is for products normally sold to individuals.

What is life insurance?

Life insurance is purchased for a specific period of time, such as 1, 5, 10 or sometimes up to 30 years. The policy expires after that period, hence the name, so the payout will only be made if the insured dies within the specified period. If the insured survives the initial term of the policy, it may be possible to renew the policy, but the premiums may be higher.

How life insurance works

Term life insurance can be a simple and straightforward life insurance option for many people. Death benefits can replace income you would have earned during a certain period, such as until a minor dependent grows up. Or it can pay off a large debt, such as a mortgage, so that the surviving spouse or other heirs don’t have to worry about the payments.

When researching life insurance options, you may come across the word “cash.” The values of life do not create the value of money. Your premiums are proportional to what you pay, so the cost to the policyholder is less than permanent life insurance. However, some insurance companies have developed long term life products with ‘advance refund’ features, which refund part of the premium paid if no claim is made at the end of the policy period. These policies can be more expensive than regular life insurance.

There are different types of maturity, including uniform and declining maturity.

• Term life insurance provides a death benefit that is equal to the policy.
• Low-cost life insurance reduces the potential death benefit over the life of the policy, usually annually.
• For more information on the different types of life insurance, click here.

What is permanent or life insurance?

Permanent life insurance, often called whole life or cash value life insurance, provides coverage for the life of the insured as long as the payments are in good standing. Unlike time, these policies can create cash value that can be accessed by the policyholder or their heirs under certain circumstances. This can result in higher premiums than life insurance. Whole life products include several categories, including traditional real life, general life, multilife, and multistandard life.

How does “pocket value” work?

When you pay fixed life insurance premiums, they go toward the cost of your policy, your premiums, and building cash value. In traditional life situations, the death benefit and payout are usually set to remain the same (levels) throughout the life of the policy. However, the cost of insurance can increase as you age, especially if you are over 80.

Carrying increasing premiums each year makes life insurance unaffordable for many seniors. Instead, the insurance company charges a higher premium over the life of the policy than is necessary to cover losses in the first year of the policy. The company invests these funds and, if necessary, increases matching premiums to help defer insurance costs for older policyholders.

By law, once these “extra premiums” reach a certain amount, they must be deposited with the policyholder as money accumulated in a savings account. If certain conditions are met, the policy holder is allowed to give or take a loan for the accumulated amount. It is important to note that a cash value is usually placed on the pension benefit left by the insurance company after the death of the insured. All home equity loans can reduce death benefits.

Temporary life or permanent life: Which one is right for me?
All permanent or whole life insurance policies generally provide whole life coverage, but may charge higher premiums than term life insurance premiums. Therefore, your death benefit may be less than your life benefit by the same amount. People choosing whole life may prefer certain features that meet their personal financial goals, such as the ability to plan payments and ongoing contributions and the ability to make tax-deferred savings through the cash value portion of their policy.

Different types of Life Insurance

When you start looking for life insurance, you are immediately faced with two major decisions: What type of life insurance is best for me? And how much life insurance do I need?

When you find life insurance options and quotes, you can navigate to the type and premium amount that matches the amount you want to pay.

To get you started, here is an overview of the types of life insurance and the basic things to know about each.

• Term life insurance
• Whole life insurance
• Life insurance for everyone
• Variable life insurance
• Burial insurance/funeral insurance
• Life insurance/joint life insurance
• Mortgage life insurance
• Life insurance loan
• Additional insurance