Types of Life Insurance

Before you buy a life insurance policy, there’s one main decision you need to make: will you buy a term or permanent policy? Both have the basics in common: they require a monthly premium payment and they offer a death benefit. However, they differ in how premiums are paid, how the death benefit is paid, and some have extra perks that stem from investment and cash value opportunities. Let’s talk about the differences between the two.

What Is a Term Policy?

Term policies provide life insurance protection for a specific period of time. If you die during the coverage period, your beneficiary receives the policy death benefit. If you live to the end of the term, the policy simply terminates, unless it automatically renews for a new period.

Term policies are available for periods of 1 to 30 years or more and may, in some cases, be renewed until you reach age 95. Premium payments may increase, as with annually renewable 1-year terms, or level (stays the same) for up to 30-year term periods.

What Is a Permanent Policy?

Permanent insurance policies provide protection for your entire life, as long as you pay the premium to keep the policy in force. In the early years of the policy, premium payments are greater than necessary so that a reserve can be accumulated to make up the shortfall in premiums necessary to provide the insurance in the later years. Should the policyowner discontinue the policy, this reserve, known as the cash value, is returned to the policyowner. Here are the main types of permanent life insurance:

• Whole life: You generally make level (equal) premium payments for life. The death benefit and cash value are predetermined and guaranteed.
• Universal life: You may pay premiums at any time, in any amount (subject to certain limits), as long as policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be decreased, and the cash value will grow at a declared interest rate, which may vary over time.
• Variable life: As with whole life, you pay a level premium for life. However, the death benefit and cash value fluctuate depending on the performance of investments in what are known as subaccounts. A subaccount is a pool of investor funds professionally managed to pursue a stated investment objective. The policyowner selects the subaccounts in which the cash value should be invested.
• Variable universal life: A combination of universal and variable life. You may pay premiums at any time, in any amount (subject to limits), as long as policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be decreased, and the cash value goes up or down based on the performance of investments in the subaccounts.

Here’s a handy chart to help you see a few of the differences between the different types of policies:

Together, we can talk through your options and pick out a policy that fulfills your family’s financial needs.

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