Life insurance is a contract between an insurer and a policyholder in which the insurer agrees to pay out a specific sum of money to a named beneficiary upon the policyholder's death. In return for this death benefit, the policyholder makes a payment, called a premium, at specific times throughout the term of the policy. Life insurance is classified into two basic types: term insurance and permanent insurance, which includes whole life, variable and universal policies.
Term Life Insurance
Term life insurance is the simplest, and typically least expensive, type of insurance. You purchase coverage for a specific price that lasts for a defined period. Your beneficiary receives benefits only if you die during the term of your policy. The cost of term insurance increases with age, and there is no cash value to the policy. Term life insurance policyholders have the option of choosing level term insurance, with premiums that remain fixed for a certain period, or increasing/decreasing term insurance, in which the level of coverage goes up or down throughout the term.
Whole Life Insurance
Whole life insurance differs from term life insurance in that it covers your entire life and you build cash value in addition to your coverage. Cash value is the amount of money available to you if you end your policy before your death. Whole life pays a benefit to your named beneficiary upon your death, and your premium does not increase during your lifetime, provided you make payments as scheduled. You can withdraw from your policy while you are still alive, but you cannot invest in separate stock, money market or bond accounts. Whole life insurance also does not allow you to split your money into different accounts or move it between one account and another.
Variable Life Insurance
Variable life insurance provides whole life coverage along with account flexibility. This type of insurance allows you to borrow money from your policy during your lifetime and permits distribution of your premium payments to different funds or accounts, but it offers no guarantee to the exact death benefit or cash value of your account. Your named beneficiary will receive a benefit upon your death that will vary based on the performance of your investments.
Universal Life Insurance
Universal life insurance is the most flexible of all life insurance types. In addition to paying a death benefit to your beneficiary, universal life insurance offers you tax-deferred accumulation and a low risk cash value account. You also have the option of choosing your premium payments and total death benefit. You can earn market interest rates on your cash value and can withdraw from or borrow on your policy during your lifetime. While universal life does not allow you to choose where to invest your premium, an alternative, called universal variable life, enables you to invest in whatever bonds, stocks or money markets you choose.
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