life insurance types: term, whole, universal, and variable

Life is complicated enough without trying to master the myriad coverage choices available when it comes to different types of life insurance. Everyone knows this stuff can be about as clear as mud, so we did the dirty work for you and put together this guide to policy options.

term life policies

If the unexpected happens, protection life insurance policies are there to, well, offer protection. Term life insurance is considered the most common, well-known form of protection policy and covers you for a specific length of time at a fixed rate.

In the event of your death, term policies pay out in a lump sum to the beneficiaries (loved ones) of your choosing, but they usually don't accrue cash over the life of the term. Most terms last between one and 30 years, and premiums are generally less expensive if you buy while you're healthy and young.

whole life policies

A whole life policy, often referred to as a permanent policy, is not defined by a specific term length, pays a guaranteed benefit to your beneficiaries when you die, and generally accrues a cash value over time through interest. This type of policy is generally exempt from income tax and the premiums normally stay the same over your lifetime.

Whole life policy payments are generally split among 3 categories:

  • Part of your premium goes toward the actual insurance portion
  • Another part is paid toward administrative expenses
  • And the balance of your premium goes to the cash accumulation portion of your policy

The cash portion of your policy usually won't be taxed if you withdraw it (assuming your policy's terms and conditions allow withdrawal). It can be used to pay your premium and other designated expenses, if you so choose.

Given the nature of whole life insurance policies — permanent coverage with a cash accumulation vehicle — premiums tend to be higher than term life insurance.

universal life policies

Sometimes referred to as flexible premium or adjustable life insurance, universal life insurance policies are a variation on whole life policies.

Universal policies are also not limited to a set term and usually have a cash accumulation aspect too. What makes universal life insurance different is the fact that premiums, cash values, and coverage limits may be increased or decreased during the lifetime of the policy (usually after life milestones or as your needs change).

Also, your insurer will set the interest rate on the cash value portion of your policy periodically, but it's usually guaranteed to never drop below a certain rate.

variable life policies

These types of life insurance policies allow you to designate a certain portion of your policy premium to a separate account similar to an investment fund. This fund includes instruments in your insurer's portfolio like stocks, bonds, and money market funds, among others.

So essentially, you have 2 accounts when you have a variable life insurance policy: the general account (or the liability account with your insurer), and the separate (or investment) account.

Variable life insurance policies provide the protection, permanence, and savings opportunities that other permanent policy types offer, but they also include a higher monetary growth potential because of the investment characteristic. Keep in mind that because of this potential, the policy's cash value and death benefit may fluctuate based on market values.

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