Life insurance, as a topic of discussion, is usually shied away from or avoided altogether. It’s uncomfortable to think about “the end” and what that might mean for our spouses and children. Nobody likes to think something of the sort could happen to them, that we all will live well into our nineties, and pass peacefully in the night in our beds.
While this idea may be comforting, the reality is probably a bit different. People of all walks of life, all dispositions, careers, and levels of health and wealth die of disparate ages and circumstances. Therefore, a good life insurance policy is of vast importance, especially for those among us who have loved ones who will ultimately be the beneficiaries of our life’s work.
It is said that a life insurance policy is a way to “immediately create an estate”. Upon successfully entering into a life insurance policy or contract, the face amount of the policy creates an estate that will avoid probate and taxes, and be paid directly to the beneficiaries of the insured. Life insurance is a very inexpensive way to leave your family possibly far more money than what can be generated over a career through savings/investments or other retirement vehicles, especially for those who are just starting out.
Generally, there are two types of life insurance: term-life, and whole-life or permanent insurance. Pretty much all other variants of life insurance are off-shoots of one of these types of insurance. We will go over the main differences of these two main types of life insurance as well as the differences of each type below.
Term Life Insurance Policies
Term life insurance is considered to be the most basic of life insurance that can be purchased. This is because term life offers just pure death benefit protection only, without any cash value builds up within the policy. Because of this, term life insurance is often very affordable – especially for those applicants who are younger and in good health at the time they apply for the coverage.¹
- Increasing and Decreasing Term Life Insurance Coverage
On some types of term life insurance, the death benefit will go down over time. These are known as decreasing term life insurance policies. (The premium, however, will usually remain the same). With a decreasing term policy, the policy ends when the death benefit reaches zero.
An individual may want to purchase a decreasing term life insurance policy to cover the balance of their unpaid mortgage. Each year, as the amount of the mortgage balance decreases, so does the amount of the insurance coverage – until eventually both will end.
Permanent Life Insurance Coverage
Permanent life insurance is different from term insurance because it offers both death benefit protection, as well as a cash value component. It also differs because, as the name suggests, it does not have a time limit like term insurance, but rather is intended to last for the remainder of the insured’s lifetime – provided that the premium is paid. There are many different types of permanent life insurance.
- Whole Life Insurance Coverage
The simplest type of permanent life insurance coverage is whole life. With this type of coverage, the premium amount is locked in and will remain the same throughout the entire lifetime of the policy. This can be helpful for those who need to stick to a budget. It also means that if a person purchases a whole life policy at a very young age, they will still pay the same amount of premium when they get older – regardless of advancing age, or even an adverse health issue. In some cases, where a person’s pre-existing conditions require the individual to buy high risk life insurance, some graded whole life policies are the only option.
- Universal Life Insurance Coverage
Another form of permanent coverage is universal life insurance. This type of life insurance also provides a death benefit and a cash value component where the funds are allowed to grow tax-deferred.
Universal life insurance is more flexible than whole life coverage, though. This is because the policyholder is allowed – within certain guidelines – to choose how much of his or her premium dollars will go towards the policy’s death benefit, and how much will go towards the policy’s cash value.
- Variable Life Insurance Coverage
Variable life insurance is also a form of permanent life insurance coverage. These types of life insurance policies offer a death benefit, as well as a cash component. However, with variable life insurance, the policyholder can take part in a variety of different investment options such as equities. This means that their funds have the opportunity to grow a great deal more than the funds in a whole life policy can. It also means that there can be more risk as funds are exposed to the ups and downs of the equities market.
- Variable Universal Life Insurance Coverage
Variable Universal life insurance is similar to regular universal life insurance coverage, except in this case, the policyholder is allowed to invest the cash in their policy into different types of investments such as mutual funds. Also, there will be no guaranteed minimum cash value in this type of policy.
- Survivorship Life Insurance Coverage
With a survivorship life insurance policy, there is more than one person that is covered. These policies can be set up in a couple of different ways. One way is first to die. With this type of policy, the coverage is designed to pay out when the first person passes away. In most instances, the premium that is charged for this type of policy can be higher than for a policy on just one insured. However, it can often be less than purchasing two separate life insurance policies.