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
they keep 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 policyowner
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
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