Two Types of Life Insurance
There are two major types of Life Insurance policies. Term and Whole life. Whole life is often referred to as permanent life insurance, and includes several subcategories such as traditional whole life, universal life, variable life and variable universal life. In 2019, 4.5 million individual life insurance policies purchased were made up of term and about 6.1 million were made up of whole life premiums, according to the American Council of Life Insurers.
Term Life Insurance
Term Insurance is the most basic type of life insurance. It only pays the benefit if death occurs during the policy term. Term life policies are often written from 1 – 30 years. Most term policies have no other benefits beyond the death benefit.
There are two types of term life insurance: level term and decreasing term.
- Level term means the amount of the death benefit stays the same throughout the term of the policy.
- Decreasing term means that the death benefit decreases, usually in one-year increments, over the course of the term.
In 2019, almost all (96 percent) of term life insurance policies were level term.
Whole Life Insurance
Whole life insurance pays a death benefit whenever you die—even if you live to 150! There are three major types of whole life insurance
- traditional whole life
- universal life
- variable universal life
and there are variations within each type.
In the case of traditional whole life, both the death benefit and the premium are designed to stay the same (level) throughout the life of the policy.
The cost per $1,000 of benefit increases as the insured ages, and the premium gets extreemly high when the insured lives to 80 years and beyond.
The insurance company could perhaps charge a premium that increases every year making it very expensive to purchase if you’re older. Instead, the provider can keep the premium level by charging a higher premium in the early years. The insurance company invests the extra premium to supplement the level premium to help pay the cost of insuring older people.
Most laws require that these “overpayments” be available to the policyholder as a cash value if he or she decides not to continue with the original plan. The cash value is an alternative to the death benefit, not an additional benefit to the policy.
In the 1970s and 1980s, life insurance companies introduced two variations on the traditional whole life product—universal life insurance and variable universal life insurance.