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6 Types of Life Insurance Policies
The two primary types of life insurance policies are term life insurance and permanent life insurance. In this article, we'll cover the differences between these two types of life insurance, help you understand their costs and show you six types of life insurance that fit into these two categories.
What Is a Term Life Insurance Policy?
Term life insurance offers coverage for an agreed-upon amount of time. This can range from shorter terms (covering you for a handful of years) to the longer term (offering coverage for up to 20 or 30 years). If you pass away during the term of your insurance policy and it is still in effect, then your beneficiaries will be paid a death benefit payment.
You might consider a term life insurance policy if you want coverage during crucial periods in your life. This might be when your child is growing up or while you are paying off your mortgage.
Term life insurance is often more affordable than permanent life insurance. However, if you die after the end of your policy’s term, your beneficiaries won’t receive death benefits.
It’s important to note that term life insurance tends to cost less if you buy your policy while you are young and healthy as compared to buying a policy later in life. Many term life insurance policies also require that you undergo a medical exam in order to gain coverage.
3 Types of Term Life Insurance
Three types of term life insurance include:
- Yearly renewable term
Premiums start low but grow larger every year
- Level term
Premiums remain the same for a specific amount of time (for example, 20 years) and then begin increasing
- Step rate term
Premiums stay flat but then increase after certain increments of time (for example, every five years)
How Does Permanent Life Insurance Work?
Permanent life insurance policies remain in force for the rest of your life, as long as you continue paying your premiums. This is what makes the coverage "permanent." These types of life insurance can also build value through a cash savings component.
Permanent life insurance policies can:
- Build in tax-deferred cash value
- Help you secure a loan, based on your policy’s value
- Potentially pay out dividends to policy holders
As mentioned before, permanent life insurance plans often have higher premiums than those for term life insurance.
3 Types of Permanent Life Insurance
Three types of permanent life insurance policies include:
- Whole life
Premiums and benefits are typically guaranteed and are established when you buy the policy
- Universal life
Premiums and death benefits can be adjusted throughout your life
- Variable life
Your cash reserve is tied to investments such as stocks, though policy levels remain the same
Deciding on which type of life insurance might be the best fit for your needs will depend on your financial assets and your family's situation.
*Applications for insurance may be subject to acceptance by insurer. Rates and coverage amounts will depend upon the carrier selected.