When you die, life insurance pays a death benefit to your chosen beneficiary. These days, almost all types of life insurance include some form of living benefit too. Let’s look at the three most common types of life insurance.
Whole Life Insurance
You may come across whole life insurance referred to by different names. Some of the other names by which it is known are “straight life insurance” and “permanent life insurance.” We’ll skip the history lesson and just say that whole life insurance is the oldest form of life insurance.
Since the nineteenth century, it has been available in its most contemporary form. There is no product that compares to whole life if you are looking for absolute guarantees. It offers a very stable and safe savings plan in addition to its agreement to pay a death benefit if the premium is paid.
Guarantees are the most important component of whole life insurance. There are three fundamental types:
- A rate of return on cash that is guaranteed.
- You are charged a guaranteed price that won’t go up or down.
- A death benefit that will last for the rest of your life.
Universal Life Insurance
A universal life insurance policy works like a term insurance policy with a savings component. Insuring your life has a raw cost, just like any other type of life insurance. This is known as the cost of insurance of a universal life policy, and it is explicitly revealed to you.
To keep the death benefit you bought in force, you must pay enough premium to cover the cost of insurance. You do, however, have other options for covering the costs. If the savings component has cash value, the cash value will cover all or part of the policy expenses or costs. Universal life insurance is unique in that it does not have a set premium.
To keep the death benefit in force, you just need to cover the cost of insurance and maybe a few other expenses. In most cases, interest will be credited to your cash value at least once a year.
Term Life Insurance
Term life insurance takes its name based on the fact that it is life insurance that is bought for a set period of time or term (usually 10-, 15-, 20-, or 30-year level periods). Your coverage, as well as your fixed, affordable premium, will expire at the end of the term.
Level term life insurance accounts for the vast majority of term life insurance issued today. Most life insurance companies will allow you to continue the plan with the same coverage at the end of the term but at a much higher cost.
Term insurance, unlike whole life and universal life, has no cash value or savings component. It is pure insurance provided for a set period of time at a low cost, making it a popular choice for those who need a specific amount of coverage to replace their income in the event of death.
