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What are the principal types of life insurance?
There are two major types of life insurance—term and whole life. Whole life is sometimes
called permanent life insurance, and it encompasses several subcategories, including
traditional whole life, universal life, variable life and variable universal life.
In 2003, about 6.4 million individual life insurance policies bought were term and
about 7.1 million were whole life.
Life insurance products for groups are different
from life insurance sold to individuals. The information below focuses on life insurance
sold to individuals.
Term
Term Insurance is the simplest form of life insurance. It pays only if death occurs
during the term of the policy, which is usually from one to 30 years. Most term policies
have no other benefit provisions.
There are two basic types of term life insurance
policies—level term and decreasing term.
- Level term means that the death benefit stays the same throughout the duration of the policy.
- Decreasing term means that the death benefit drops, usually in one-
year increments, over the course of the policy’s term.
In 2003, virtually all (97 percent) of the term life insurance bought was level term.
For more on the different types of term life insurance, click here.
Whole Life/Permanent
Whole life or permanent insurance pays a death benefit whenever you die—even if you
live to 100! There are three major types of whole life or permanent life insurance—traditional
whole life, universal life, and 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 person ages, and it obviously
gets very high when the insured lives to 80 and beyond. The insurance company could
charge a premium that increases each year, but that would make it very hard for most
people to afford life insurance at advanced ages. So the company keeps the premium
level by charging a premium that, in the early years, is higher than what’s needed
to pay claims, investing that money, and then using it to supplement the level premium
to help pay the cost of life insurance for older people.
By law, when these “overpayments”
reach a certain amount, they must 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, not an additional, benefit under 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.
For more on
the different types of whole life/permanent insurance, click here.
Source: Insurance Information Institute www.iii.org
VIDEO: Stop / Play Life Insurance 101