Types of Life Insurance

In the article History of Insurance, we examined the concept of risk, which is the possibility of loss. For a life insurance policy, however, the element of risk is somewhat different. When an insurance company writes, for example, a homeowners’ policy, it hopes that nothing happens to the property and a claim will never be filed. When an insurance company issues a life policy, it knows that it will someday be faced with paying a claim upon that policy, because every person eventually dies.

The basic premise of all life insurance is the same: to provide a benefit to ease the financial burden of the beneficiaries upon the loss of the insured person. This death benefit is universal. There are, however, several ways in which life insurance is structured to provide this benefit. All life insurance can be categorized under one of three general types: whole life insurance, term insurance, or flexible insurance.

Whole life insurance is designed to provide protection for the whole life of the insured person. Also known as permanent or ordinary insurance, this type of coverage accumulates cash value over the life of the policy. This cash value is guaranteed to the policy owner. If he or she decides to stop paying the policy premiums, they may “cash in” the policy and receive the cash value that is available at that time. The face value (or, the amount of coverage) of whole life insurance remains the same. Policy premiums (the amount that you pay for coverage) also generally remain level.

The accumulated cash value of a whole life policy can also be borrowed against by the policy owner, who may or may not elect to repay the loan. If he or she elects not to pay it back, then the amount is called a withdrawal and is subtracted from the cash value available as well as the face value of the policy. For instance, if an insured person dies with a $50,000 whole life policy, but previously withdrew $5,000 for a vacation, the payable death benefit would be reduced to $45,000. If the policy owner elects to pay the borrowed amount back, it is payable with interest.

Term life insurance is designed to provide protection for a limited period of time, which is the term of the policy. However, if the insured does not die during the term that the policy is in force, the face value nor premium are refunded. Term insurance is used to provide economical insurance coverage at times in the life of the owner when it may be more advantageous to have additional coverage. For example, more coverage may be required by the parents when children are born, until the time when they are grown up and out on their own. The face value of the policy may remain the same during the term of the policy (Level Term), decrease (Decreasing Term), or increase (Increasing Term). Term policies are discussed in more detail in the article Term Life Insurance.

Flexible life insurance policies include adjustable life, universal life, and variable life insurance. Although each of these has its own unique characteristics and features, the one common factor that they have is flexibility, giving the policy owner numerous options in terms of premiums, face amounts, and investment objectives. He or she can change these components of the policy in response to changing needs and circumstances. For a more in-depth discussion of flexible insurance, please read the article Flexible Life Insurance Policies.

There are many different individual policy types. Consider where you are in life, and what your financial needs consist of. Should anything happen to you, what will it take to maintain your family’s quality of life? These are not pleasant questions to ask, but they are prudent ones. Proper answers and sound knowledge are the keys to making the best financial choices for your situation.