Life Insurance – Different Types Explained


What Are The Types of Life Insurance?

All life insurance is not the same. The first thing to understand is that there are different basic types of policies. While there is not one best type of life policy, if you understand the difference, you should be able to find the best type for you.

Term Life Insurance

As the name implies, term policies last for a specific amount of time. While terms of 10, 20, or 30 years are common, can you even find 1 year term policies. In its most basic form, it will not grow any cash value. The policy simply provides coverage for the length of the contract. That is why this type of policy is sometimes called pure insurance.

The thinking behind buying this kind of temporary policy is that the need for coverage will not last forever. For example, some people buy a policy with a high enough death benefit to pay off a mortgage and support young kids. In a few decades, these needs should change as chyidren become self supporting and homes get paid off.

Since this is pure insurance, and since it has an end date, this is usually the cheapest form of life policy to buy.

Whole Life Insurance

Sometimes this is also called straight or traditional life insurance, it is the oldest form of life policy. As the name implies, it will cover a person for their whole life. It is not written for a term that will end. That is, as long as the policy is kept in force. By in force, I mean that the policy is paid for or paid off.

Whole life can grow a cash value too. So sometimes the policy can actually build up an asset that can be cashed in or borrowed against.

Because whole life can grow a cash value, and because it is not temporary, whole life usually costs more for the same amount of a benefit than term life does.

Universal Life Insurance

This is the newest type of life policy. It provides permanent coverage, but also has a cash account which can grow over time. The cash account may grow by a set interest rate or some market index. Like whole life policies, it can also be cashed in or borrowed against if there is a cash value.

Universal life policies can also be very flexible. There is a target premium which is set to reach a certain goal. But there is also a minimum payment which is just enough to keep the policy in force. A policy could also choose to pay more than the target premium in order to grow the cash value faster.

Which Type of Life Policy Should You Buy?

There is not one right answer for everybody. Your own best choice will depend upon the amount of coverage you need, your financial plans, and your budget. Many people choose term because the lower premiums allow them to buy a higher death benefit. Others pick whole life because it will not expire. And some think that the combination of coverage and savings is a great benefit to universal life.

Source by Marilyn Katz