Types of Life Insurance

By Paul R. Ruedi, CFP®

People who need life insurance have many different options. The two main categories are “term” life insurance, which only provides coverage for a certain number of years, and “permanent” life insurance that provides a benefit at death whenever it may occur.

Term life insurance provides insurance coverage for a specific time period, which can be as short as one year or as long 30. If the person pays their premiums and passes away during that period, their beneficiaries will receive the death benefit. If they do not, the policy expires and there is no payout.  Term insurance is usually the cheapest type of life insurance for this reason.

Permanent life insurance usually lasts all the way until your death, without an expiring term. There are several different types of permanent insurance policies that have different features and fall into four main categories: traditional whole life, universal life, variable life, and variable universal life.

Whole life insurance premiums are usually fixed, as is the death benefit, and over time a certain amount of cash value builds in the policy and grows at guaranteed minimum growth rate set by the company. It is typically one of the most expensive types of policies.

Universal life insurance is similar but slightly more flexible. With a universal life policy, the death benefit may be changed, and once you have accumulated enough money in the cash savings portion of the account you have the option to lower your premiums or stop paying them entirely if there is enough cash built up to cover them.

Universal life insurance can be “guaranteed” with level premiums and a death benefit up to a certain age, but with a minimal cash value component. There are also “indexed” universal life insurance policies that tie the cash value of the policy to a stock market index like the S&P 500 – though usually by a set formula that caps gains at a certain amount and materially limits growth.

Variable life insurance gets its name because the cash value is invested in subaccounts, which work like mutual funds holding stocks, bonds, and other assets, so the cash value can rise and fall with the markets. The death benefit typically has a guaranteed minimum, though it can rise if the investments do well. Variable universal life is similar in that it has an investment component, but with the added flexibility of being able to adjust your premium and death benefit.

Insurance is complicated and there is no perfect one-size-fits-all policy. Make sure to do your due diligence or talk to a financial professional when making this decision.

Paul R. Ruedi is a Certified Financial Planner™ professional with Ruedi Wealth Management in Champaign, Illinois.