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Inside this Article
What
Are The Principal Types Of Life Insurance?
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There are two
major types of life insurance—term and whole life.
Whole
life is sometimes called permanent life insurance, and it
encompasses several subcategories, including traditional whole
life, universal life, variable life and variable universal life.
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In 2003, about 6.4 million individual life insurance policies
bought were term and about 7.1 million were whole life.
Life insurance products for groups are different from
life insurance sold to individuals. The information below
focuses on life insurance sold to individuals.
Life
Insurance - Term
Term 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. Most term
policies have no other benefit provisions.
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.
- Decreasing term means that the death benefit drops,
usually in one-year increments, over the course of the policy’s
term.
In 2003, virtually all (97 percent) of
the term life insurance bought was level term.
Whole Life/Permanent
Whole life or permanent insurance pays a death
benefit whenever you die—even if you live to 100! There are three
major types of whole life or permanent life insurance—traditional
whole life, universal life, and variable universal life, and there are
variations within each type.
In the case of traditional whole life, both the death
benefit and the premium are designed to stay the same (level) throughout
the life of the policy. The cost per $1,000 of benefit increases as the
insured person ages, and it obviously gets very high when the insured
lives to 80 and beyond. The insurance company could charge a
premium that increases each year, but that would make it very hard for
most people to afford life insurance at advanced ages. So the
company keeps the premium level by charging a premium that, in the early
years, is higher than what’s needed to pay claims, investing that
money, and then using it to supplement the level premium to help pay the
cost of life insurance for older people.
By law, when these “overpayments” reach a certain amount, they must
be available to the policy owner as a cash value if he or she decides
not to continue with the original plan. The cash value is an
alternative, not an additional, benefit under the policy.
In the 1970s and 1980s, life insurance companies introduced two
variations on the traditional whole life product—universal life
insurance and variable universal life insurance.
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