Exploring the Different Types of Life Insurance

There are several different types of life insurance you can choose from. Generally speaking, life insurance policies can be divided into two broad categories: temporary life insurance and permanent life insurance. The former provides coverage for a certain fixed term, while the later provides coverage for as long as you live. Those two broad categories can be divided into three subcategories: term life insurance, whole life insurance and universal life insurance. These three categories will be the focus of this article.

Understanding Life Insurance

Life insurance policies provide financial compensation to your designated beneficiary or beneficiaries in the event of your death. A beneficiary can be your spouse, your child, your dependant or anyone else you wish to designate. The beneficiary receives the payment as a lump sum. While the beneficiary has a right to use the lump sum as he or she pleases, the life insurance payment is traditionally used to cover your funeral costs and settle any financial obligations you may have left behind. If the beneficiary cannot earn a living on his or her own, the life insurance policy usually provides a source of income for a certain number of years.

The subcategories of term life insurance, whole life insurance and universal life insurance are based on policies' terms, how much policies are worth and how long coverage lasts.

Term Life Insurance

Term life insurance is a life insurance policy that lasts for a certain number of years. That number of years is known as the term. The term will vary depending on the policy and can be anywhere between 5 and 35 years. You will need to make premium payments through the policy's term. The premium will remain the same throughout. Once the term ends, you have the right to renew the policy for another term. Once you renew it, however, the premium will either increase or decrease depending on the market conditions on the day of renewal.

Term life insurance is the cheapest option if you know that you will need life insurance for a specific period (for example, until your children finish college). The fact that the premiums remain the same for the term makes it easier for you to plan your budget. On the contrary, it can become more expensive if you need to renew the policy.

Whole Life Insurance

As the name implies, whole life insurance is a life insurance policy that lasts for as long as you live so long as you make premium payments. The premium payments will always remain the same. This tends to be the most expensive type of life insurance in terms of the initial costs. However, you still benefit from fixed premiums, and you get the comfort of knowing that so long as you can pay those premiums, the policy will automatically be available to your beneficiaries once you die.

Universal Life Insurance

Like whole life insurance, universal life insurance remains in force for as long as you pay the premiums. However, unlike with whole life insurance, its premiums will decrease or increase annually depending on market conditions. In terms of initial costs, universal life insurance tends to be more expensive than term life insurance but cheaper than whole life insurance. However, the fact that the premiums are variable can be both an advantage and a disadvantage. If the premiums drop down and stay low, you will be able to save more money in the long run than you would with any other type of life insurance. If the premiums rise, it will become more expensive. Furthermore, the variable nature of the premiums makes it harder for you to budget your payments in advance. Because of this, you may have a harder time keeping the policy in force than you would with whole life insurance.