There are two major types of life insurance, term life, and whole life.
1. Term life insurance is the simplest form of life insurance. It pays only if death occurs during the term of the policy, which is usually from one to 30 years. Basically, you buy term life insurance, say with a 10-year term, then if you die in the next 10 years the insurance pays out to your family. If you die in 15 years or 11 years or 20 years the insurance does not pay.
There are two basic types of term life insurance policies, level term and decreasing term.
a. Level term means that the death benefit stays the same throughout the duration of the policy. Most of the term life insurance that people buy today is the level term.
b. Then there's that decreasing term, which means that the death benefit drops, usually in one-year increments over the course of the policy's term. The alternative to term life is whole life. Whole life, which is sometimes called permanent insurance, pays a death benefit whenever you die even if you live to be 100. Whole life encompasses several subcategories including traditional whole life, universal life, and variable life. With traditional whole life, both your death benefit and your premium are designed to stay at the same level throughout the life of the policy.
2. Traditional whole life insurance is a simple flat-rate premium each month. The cost per thousand dollars of benefit, that is the $1,000 that your beneficiaries get when you die, increases as the insured person ages, and it obviously gets very high if the insured person lives to be say 80 years or more. So the earlier you buy that traditional whole life insurance, the cheaper the cost will be per month. The later you buy it, the more expensive it'll be per month.
Next, we have universal life insurance(VUL), which is just a type of cash-value life insurance. It's just like traditional whole life insurance, in that you get a payout whatever age you are when you die. This type of insurance acts a bit like a savings account too. You can put extra cash into it, and the cash will be paid out to your family with interest when you die. You can also take extra cash out of the universal life insurance before you die if the policy is over-funded.
There are very specific rules about taking money out of the policy though, so you do need to be careful if you're going to do this. Then we have that third category the variable life. Variable life insurance builds a cash value over time. In a variable life insurance policy or VL, the cash value can be invested in a wide variety of separate accounts, similar to mutual funds.
Unlike a universal life policy though, the value of the VUL at your death depends on which specific investment choices you made. So it's similar to investing your money in mutual funds. If you make good investments, those mutual funds are worth a lot. If you make bad investments, they're not worth much. Variable life works the same way.
Both universal life insurance and certain types of variable life insurance called variable universal life insurance policies, allow you to pay either a lot or a little in premium each month, and the value of your policy changes based on that payment. I know there's a lot here but now you can consider which life insurance is right for you. Do you want insurance for a specific period of time, consider a term life policy.
Do you want insurance throughout your life with a fixed cost, a whole life policy might be the best choice. Want to be able to vary how much you pay into the policy depending on your budget each month, a universal life policy could be a good choice then. Or if you want to combine life insurance with your investing acumen, a variable life policy might be the right fit. It all depends on you and your needs and objectives.
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