Common Types of Life Insurance

Life insurance comes in many forms to suit different needs, but all policies are signed to provide peace of mind. If a loved one dies, life insurance ensures that surviving dependents and family members are not left financially vulnerable.

All life policies have a stated death benefit, or “face value,” which is the amount of money the insurance company pays if the insured person dies while the policy is active. Death benefits are not subject to federal income tax.

You may buy life insurance for yourself or someone else (such as a child, relative, spouse, or employee). The policy owner is the one responsible for paying premiums (the cost of the insurance) and making changes.

Multiple policies can insure the same person’s life, and many people blend term and permanent policies, or take out a traditional policy in addition to a policy offered through an employer.

State laws may have individual regulations regarding policy conditions and limits.

Term Life Policies

Term life policies are non-permanent policies, best suited to cover short-term needs. Term policies expire after their “term” is up, which can be as little as five years or as long as 30 years. 

The death benefit does not change unless the policy is reissued or converted into a different type of policy, and you cannot borrow against the policy. Term life insurance is the cheapest form of life insurance, mainly because few people die during the term of their policies.

Mortgage Insurance

Mortgage insurance is a variation of term policy designed to protect the beneficiary from inheriting unpaid mortgage debts. While traditional term life has a fixed face value, mortgage insurance has a face value that declines over time as the size of the mortgage also declines.

Whole life, variable life, and universal life are each types of permanent policies, which means that they last the full life of the insured, as long as the policy owner continues to pay the premiums. 

Unlike term policies, permanent life insurance often increases in cash value, similar to a savings account. Permanent policies are most often used to cover the permanent needs of the survivors, such as lost income and funeral expenses.

Whole Life

Whole life insurance is a type of policy written with a fixed death benefit and fixed premiums that do not change once the policy is issued.

In this kind of policy, the cash value is guaranteed to grow at a rate set by the insurance company, no matter what market conditions are. The policy owner can borrow from this cash value as it grows, although policy loans will accrue interest and reduce the death benefit if the insured dies while the loans are unpaid.

Whole life policies may be sold as “prepaid,” which require higher premiums for a defined length of time. After these premiums have been paid, the policy is considered paid and will remain in effect until the death of the insured.

Universal Life

Universal life insurance is a version of whole life that provides more flexible options for the insured. The death benefit is not fixed, as it is in a whole life; it may be increased or decreased, and the interest rate is sensitive to the market.

With universal life, the insured has the option to change the amount of premium paid into the policy. Paying less into the policy reduces the “account value.” Like a whole life policy, universal life insurance can be borrowed against, reducing the death benefit.

Variable Life

Variable life insurance is an even more flexible option than universal life, with more of an investment component. A portion of premiums are invested and are subject to market fluctuations, so the death benefit depends on the strength of the economy. 

Many insurance companies set a minimum death benefit to protect the insured from losing all the money they have invested in the policy. While policy earnings are not taxed, you cannot withdraw cash value without surrendering the policy.

Group Life

Group life insurance is commonly offered by a company to its employees. Group life policies are much less expensive than traditional life insurance and are often paid for via payroll deductions. While buying life insurance through your employer is often the most affordable life insurance option, it is important to remember that this type of policy is usually terminated if the insured leaves the company. 

Life insurance premiums are higher for older or less healthy people, so it may be more difficult to buy insurance after changing jobs or retiring.

Life insurance is a complex financial tool. It is always best to review your specific needs with a trusted insurance professional to establish the amount you need to protect your loved ones, and to ensure that your life insurance is both appropriate and affordable for you.

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