What are the Different Types of Life Insurance?
Many people aren’t aware there are different types of life insurance, even though understanding those differences can mean quite a bit to their ultimate financial security.
There are two main categories of life insurance, and each has variations:
Cash value insurance
Cash value insurance, often called whole life or universal life, provides insurance combined with a built-in savings plan. In most cash value plans, your excess premium dollars (money you paid that wasn’t needed to pay for insurance costs and expenses) are invested with the insurance company. Cash value plans are generally much more expensive than term insurance when you contrast the premiums with the amount of insurance coverage received.
Another type of cash value insurance, variable universal life (VUL), offers consumers the option of choosing how the excess premium dollars are invested. Most VUL plans have numerous investment choices in the form of stocks, bonds and money markets. These mutual fund-like accounts allow VULs to earn returns usually not seen in other life insurance plans. Be aware, however, that the insurance company won’t guarantee the investments that support the VUL insurance, so it’s possible to lose money on the investment portion — but not on the life insurance.
Term insurance
Term insurance doesn’t have a savings plan attached to it like cash value insurance, so when you die your beneficiary receives only the face value indicated in the policy. Term is also the least expensive form of life insurance, because you’re paying for protection for only a limited period, usually when your family’s financial life is at greatest risk. In spite of its lower cost, it also has the highest payouts.
There are three types of term insurance payouts:
- Increasing term, which has payment increases every year but the amount of coverage remains the same
- Decreasing term, which has fixed payments but the amount of coverage decreases every year or so
- Level term, which has level payments and coverage for a fixed period of 10, 15 or 20 years or longer
The truth is that if no one depends on your income or would be harmed financially if you were to die, then you probably don’t need life insurance. That’s obviously not the case, though, if you have a spouse, children, parents or anyone else depending on you, or if you have a large debt load. Under those circumstances, it’s critical to have an appropriate life insurance plan that will take care of your dependents if something happens to you. And it’s important to shop around to find that plan, no matter what types of life insurance you’re interested in, because not all policies are created equal.