What Are The Principal Types of Life Insurance?

There are two major categories of life insurance term and whole life. Whole life is sometimes called permanent life insurance, and it encompasses several subclasses, including traditional whole life, universal life, variable life, and variable universal life. In 2018, 4.0 million individual life insurance policies were purchased, and 5.9 million were whole life. 

Life insurance products that are intended for groups differ from those for individuals. This information is geared toward life policies sold to individuals.

Term

Term insurance is the simplest type of life insurance. It covers only so long as the insured lives during the term of the policy, which is usually from one to 30 years. Most term policies have no other beneficiary provisions. 

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

• The death benefit is maintained at the same level throughout the duration of the policy.
• Decreasing term indicates that the death benefit drops, typically in one-year increments, over the course of the policy's term.

In 2003, almost all (97 percent) of the term life insurance bought was level term.

Whole Life/Permanent

Whole life or permanent life insurance pays a death benefit when you die even if you live until the age of 100! Three major types of whole life or permanent life insurance are traditional whole life, universal life, and variable universal life, and there are variations within each type.

In the case of traditional whole life, both death benefits and premiums stay stable (level) throughout the life of the policy. The cost per $1,000 of benefit rises as the insured person ages and, at 80 and beyond, it grows appreciably. 

The company may charge more for life insurance as it ages, but it might have to raise premiums every year in order to be affordable. It opts to keep the premium by charging a higher rate that takes several years, investing the extra money, making the policy affordable and then utilizing it to increase the level premium to help pay for life insurance outlays for senior citizens.

By law, when these overpayments reach a particular amount, they must be available upon cancelation as a cash value benefit for a customer who does not continue with the original plan. The cash value benefit is a replacement, not a supplement, under the policy.

Life insurance companies and insurers marketed two variations on the traditional whole life product universal life insurance and variable universal life insurance in the 1970s and 1980s.