Life insurance is something that many individuals have, but few understand completely. The basic premise is the same: life insurance, no matter what type, is paid out to the beneficiaries of your choice upon your death. There are five basic types, each with different costs, options and benefits. Choosing the one right for you depends on your own unique situation. A financial adviser can help you determine the one best for you.
Term
Term life insurance is the least expensive of all insurance policies. These plans are for a set length of time, up to 30 years. If you die within that time frame, or the term, your family will receive a benefit payment depending on the coverage you chose. Term life insurance has no cash value, and after the term is over, has no benefit to you or your family. These policies are a good choice for individuals who need to be insured for a shorter period of time. For example, parents who have small children may not desire coverage after the children are grown and on their own. Some term life policies may offer the option of receiving a repayment of the premiums at the end of the term, but these policies can cost 20 to 30 percent more.
Whole
Whole life insurance is classified as a permanent insurance policy that builds cash value. It does not expire at the end of a period of time like term life. Whole life provides a set minimum death benefit amount, as well as a set premium for life. With whole life, you can also earn dividends after the second year, or this money can be left in your policy, increasing the death benefit amount. Whole life premiums do not increase as you age, so there is no worry about health problems increasing your rates.
Variable
Variable life insurance does not have a set benefit payment amount after death. With these policies, you are able to choose different investments, and the cash value and benefit amount fluctuate depending on the market. More of the risk is transferred to the policyholder with variable life instead of being on the insurance companies like with term and whole life insurance.
Universal
Universal life insurance does not have set premium payments. With this type of life insurance, policyholders are able to make payments in any amount within a set minimum and maximum. This makes it ideal when budgets are tight. Universal life may or may not build cash value, depending on the market situation, administrative costs and interest rates. It is also possible for these policies to lapse due to those same conditions. Universal life policies can be purchased with a "no-lapse guarantee," which means that even if those situations arise, the policy will not lapse.
Variable Universal
As the name implies, variable universal life insurance is a blend of both variable and universal life insurance. It is the most expensive permanent life insurance option. The cash value and death benefit fluctuate depending on the stock market, just like variable life insurance; however, it does have a guaranteed minimum death benefit in case the policyholder dies while the market is down.
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