The main goal of a life insurance policy is to cover funeral costs and outstanding debts and expenses when a person dies. These costs would otherwise become the responsibility of surviving family members. Thus, life insurance names a beneficiary, or a person who will collect on the insurance policy after the death of the insured. Life insurance benefits can either be paid to a single person (such as a spouse) or divided among multiple people (such as the insured’s children).

There are 2 major types of life insurance, “term” and “permanent.” Permanent life insurance is further divided into 3 types, each with a unique structure. Term life insurance is a temporary policy, lasting for a predetermined number of years. The other 3 types, whole, universal, and variable, are all considered “permanent” because they are designed to be in force for the remainder of the insured’s lifetime.

Term Life Insurance

• Fixed premium payments
• Limited term; must be renewed to maintain benefits if policy has not been cashed in by the end of the term
• Fixed benefit amount no matter when the policy pays out

Term life insurance is the cheapest type of life insurance policy. With term life insurance, the insured pays a set premium for a set amount of time, and if he/she dies during that term, the policy benefit amount will be paid to beneficiaries. The premium never increases or decreases during the term of the policy, and the maximum policy benefit also remains constant no matter how many premium payments are made. At the end of the term, which can be anywhere from a year to several decades, the insured person must renew the policy for another term. If the insured outlives the term of the insurance policy, benefits are not paid out automatically, and the policy does not remain in force unless the insured chooses to renew for another term. If the policy is renewed, premiums for the new term will increase because the risk of death increases with age.

Whole Life Insurance

• Coverage spans entire lifetime
• Fixed premium payments
• Insurance company may invest premium payments
• Fixed benefit amount

Unlike term life insurance, which spans a predetermined amount of time, whole life insurance lasts for your entire life. When you make payments on a whole life policy, a portion of that money is used for investments. The insurance company is in charge of the investment options, but normally the insured person is guaranteed a minimum return on investment. The investment returns add cash value to your insurance policy, which can either be used to offset premium payments or can be borrowed. It can also be used as collateral for standard bank loans and withdrawn if needed.

When the insured person dies, the beneficiary receives the benefit amount specified in the policy. The additional cash value is not added to that benefit amount, but is reabsorbed by the insurance company. You do have the option (at a higher cost) of setting up a policy that will pay out the entire benefit amount and the cash value portion to your beneficiary in the event of your death.

Universal Life Insurance

• Coverage spans entire lifetime
• Variable premium payments
• Beneficiary may receive the cash value portion of your policy in addition to benefit amounts specified in policy

Universal life insurance is designed to be a more flexible version of whole life insurance. A portion of the premium payments are placed into a cash value account, which gains interest at a guaranteed minimum rate and can also be used for investment. If, during the course of the policy, the cash value account exceeds the maximum benefit amount, you may be able to stop making premium payments. Also, with universal life insurance, the insured has the option of adjusting the benefit amounts. The policyholder can also make a choice in benefit options: either the benefit amount specified in the policy, OR the benefit amount plus the accumulated cash value can be paid to the beneficiary. The second option costs more in premiums.

Variable Life Insurance

• Coverage spans entire lifetime
• Fixed premium payments
• Offers wider options for investment of cash portion, for possible higher returns
• Benefit amount may vary

Variable life insurance allows for more income potential on the cash portion of the policy that does not go toward premium payments. Typically, the cash is invested in higher-risk ventures, which has the benefit of higher potential earnings, but also carries the risk of loss. Variable life insurance policies are sometimes used primarily as investment vehicles, but unlike with universal and whole life policies, there is no minimum guaranteed return on investment and the policyholder has the potential for greater loss. With variable life insurance, the insured also has the option of including the cash value of the policy in the benefit amount, for a higher premium.

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