Term life insurance remains in force for a set number of years, and the term is specified in the policy.
For example, a one-year term policy only remains in force for one year. Level-term policies allow you to purchase life insurance for multiple years while paying a flat premium amount. A 10-year level-premium term policy, for example, provides death benefit coverage for 10 years with the price holding the same throughout the term. At the end of the term, your premium would increase if you renewed or reapplied for the same death benefit coverage because of your increased age and mortality risk. Term life is pure insurance coverage with no investment or savings component, so this type of insurance is appropriate if you only need insurance for a specific number of years and want a low-cost life insurance solution.
Whole Life
Whole life insurance provides death benefit protection for your entire life rather than for a set number of years. To keep premiums level in a whole life policy, the insurer collects more money than what is needed to pay for the death benefit protection. This excess premium is used to build a cash reserve that grows at a contractually guaranteed rate each year. This cash reserve helps pay for the cost of the death benefit in the later policy years. You may borrow against this cash reserve, called a cash value, during your lifetime for any reason. Some whole life policies require you to pay premiums for your entire life, while other policies only require you to pay premiums for a set number of years or until you reach a certain age. This type of policy is appropriate when you want lifetime insurance coverage and want to combine an element of savings with your insurance policy.
Universal Life
Universal life insurance is a blend of a one-year term life policy and a separate savings and investment account. The insurer deposits your premium payments into a cash value account, deducts the cost of insurance from the account, and then credits interest from investment earnings back to the cash value. If your cash value account falls to $0, then your policy terminates and you lose your insurance coverage. Policy premium payments and death benefits are flexible. You may increase, decrease, skip or even stop premiums as well as increase or decrease the death benefit coverage you carry. You may also choose between purchasing a level death benefit option, which doesn’t change over your lifetime, and an increasing death benefit option, which includes the death benefit and the cash value amount. This type of insurance is appropriate when you want lifetime death benefit coverage and flexibility in your policy.
Variable Life
Variable life insurance works somewhat like whole life and universal life insurance in that the policy provides lifetime death benefit coverage and a cash value component. However, variable life contains an investment function that makes the policy more like an investment and less like insurance. Premium payments are directed toward the insurance company’s separate account, which comprises stock, bond and money market funds. You choose the funds you want to invest in, and the performance of those funds determine the cash value and death benefit values. If your investments do well, you’ll see a corresponding rise in your policy values. If your investments do poorly, your policy values decrease and you may even lose your insurance coverage. This policy type is appropriate when you want to combine an element of investing with your insurance policy.