Life Insurance Basics

There are two major types of life insurance—term and permanent life insurance. 

Term Life Insurance
Term Insurance is the simplest form of life insurance. It pays a benefit when the insured’s death occurs during an established period of time, which could be one, five, 10 or even 30 years.  Term life policies are renewable but premiums increase with age.

The premium for a term life insurance is generally based on the insured person’s age at the policy’s start, and the premium remains the same (level) for the length of the term or may follow an age-banded rate structure where the premium changes every 5 years.

There are two basic types of term life insurance policies—level term and decreasing term.

• Level term – means that the death benefit stays the same throughout the duration of the policy. Most individuals own this type of coverage.
• Decreasing term – means that the death benefit drops, usually in one-year increments, over the course of the policy’s term.

Permanent Life Insurance
Permanent life insurance includes a variety of products, including but not limited to whole life, universal life, variable life and variable universal life.

• Whole Life – cash value life insurance that combines protection against premature death with a savings account included.  Premiums are fixed and guaranteed and remain level throughout the policy’s lifetime.
• Universal Life – a flexible premium policy that combines death protection with a type of savings vehicle that earn interest based on market rates.  Death benefits could be modified during the life of the plan and premiums can be paid at any time but the policy could lapse if sufficient premium is not paid to cover the annual mortality charges and administrative costs.
• Variable Life – a policy that provides a death benefit with a savings account that can be invested in stocks, bonds, and money market mutual funds at the policyholder’s discretion.
• Variable Universal Life – this plan combines the premium and death benefit flexibility of a universal life plan with the investment flexibility and risk of variable life insurance.