What kinds of life insurance are there?

Most of us didn’t get to learn this in school, so we hope this primer will be helpful.

There are two types of life insurance: Term Life and Whole or Permanent Life. This is what that means:

 

Term Life

Your simplest type of life insurance, term is the best choice for most people. Term policies last for a designated number of years after which you either need to purchase a new policy or go without. As long as you have been paying your premiums, the insurer will pay the face amount of the policy to your beneficiaries if you die during that term.

Words to know

Term: The number of years that the policy will be in effect (often 10 or 20). The date on which the policy ends is called the maturity date.

Premium Payments: Level premium payments stay the same throughout the term; annual renewable term (A.R.T.) guarantees you the option to renew the policy at the end of each year, but your premiums will go up. Adjustable premiums allow for annual changes in premium amounts but with a cap.

Premium Return: Some policies will return part of your premiums to you if you outlive the term; a term with this provision will cost you more than a simple term policy.

Whole or Permanent Life

As the name suggests, Whole or Permanent life insurance has no maturity date; it covers you throughout the remainder of your life as long as you’ve paid your premiums. But Whole Life policies have another component that makes them different from Term—a cash or investment account built into the policy. The great thing about this is that it forces you to put money away at the same time that you are paying your premiums. On the other hand, this means that a Whole Life policy is significantly more expensive.

Words to know:

Participating: A “participating” plan pays dividends depending on the company’s returns; these can be used to pay premiums, taken in cash or left in the invested portion of the policy.

Premium payments: premium payments can be “level” (stay the same throughout the policy), “limited” (higher but for a limited period), “single” (just one, large payment), or “adjustable” (the company reserves the right to increase or decrease premium payments).

Variable: In a variable policy, both the value of your investments and the death benefit will vary according to the how well the investments in the account perform. Traditional variable policies will guarantee you a minimum death benefit as long as premiums are paid.

Universal: A universal policy allows you and the company to move money around amongst the premiums due, death benefit amount and investment account depending on investment returns and premium adjustments. Universal life is flexible but risky unless carefully managed—you can find your policy lapsed if not enough of your money is going to premiums.

Surrender Charges: the fee for canceling your policy and withdrawing your cash balance.

-Amy Witherbee, Revolution Capital

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