What are the basic types of life insurance?

Basic types of insurance coverage

There are two primary types of life insurance: term life insurance and whole, or permanent, life insurance.

Term life insurance

Term life insurance pays death benefits only if the insured dies during the term of the policy. If the insured is still alive at the end of the term, coverage expires, although it can be renewed.

This is the best coverage for someone who needs insurance for a set period of time, such as purchasing a 20-year policy to ensure that dependents would be able to afford to go to college or to make sure a debt would be paid off if the insured died. This type of insurance is convertible into a permanent policy, but does not built equity.

Permanent life insurance

Permanent, or whole, life insurance pays death benefits whenever the insured dies. This is the best coverage for someone who wants to have a savings, as this type of insurance builds equity. Premiums for permanent insurance are higher than for term policies, but remain the same throughout the life of the insurance, while term insurance premiums can increase every time the policy is renewed.

There are three types of whole life insurance: traditional, universal, and variable universal.

Traditional whole, or ordinary, life is insurance is the most common type of permanent insurance – it provides death benefits and premiums that remain the same throughout the life of the policy.

Universal, or adjustable, life insurance provides the opportunity to increase death benefits, and even altering the premiums, using the cash value of the savings in the account.

Variable life insurance provides a combination of death benefits and a savings account, for which the insured can plan the investments, into stocks and bonds, and is considered a risky form of life insurance.