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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 the comapny keeps 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.
For more on the different types of whole life/permanent insurance,
click here.
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