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2 Main Types of Life Insurance

There are two main types of life insurance, term and whole life. While you might hear of other types such as universal life or variable life, these both fit in the main category of whole life policies. The primary difference between the two is cash value and the length of time the policy remains in force.

  1. Cash Value

    • While some term policies may offer a return of premium option, or have a small buildup of cash value in the middle years of the policy, that doesn't make them whole life insurance and these are the exceptions rather than the rule. Most whole life insurance policies charge higher premiums in the initial years of the policy so the premium remains level throughout the life of the policy. They also accrue cash value that can be more than what you paid in premiums for the life of the policy.

    Length of Time

    • Some term policies remain in force until you're a specified age, such as 75, but at that point, even if you want to pay the premium, the policy ends. Most term policies have a specified time when the policy ends and you no longer can continue it. Whole life insurance lasts your entire life as long as you continue to pay the premium or reach the age of 100, when most policies endow, give the face value of the policy to the insured.

    Rising Premiums

    • Since the cost of the term policy is simply the cost of the pure insurance with no investment inside the policy, the premiums increase every year. While some term policies offer level premiums and have a minor cash value, they are still term because they end at a specified time such as 65. Some whole life insurance policies may also have increasing premiums for a few years to make them more affordable in the beginning years, but the company designs them to last your entire life.

    Universal Life

    • When you discuss universal life, you can always find someone that has to pay an increased premium because the investments in the policy didn't make as much as predicted. A universal life policy lets the insured take the risk when it comes to investment results. Agents can show hypothetical results at 7 to 8 percent that mean the policy never requires additional premium. However, if the real investment return was only 5 percent through the life of the policy, the return plus the premiums paid won't be enough to pay the cost of insurance and you'll have to increase your premium later in life. This doesn't make a universal policy a term policy, because if you increase your premium, you still get to keep the policy.

    Term vs. Whole Life

    • Term premium is normally cheap if you're younger and very expensive the older you become. Whole life is the opposite, with the higher premium when you're young that remains level through your life. If you need large amounts of insurance but have a small pocketbook, term insurance is the best choice for you. If you can afford a whole life policy and know you'll need the insurance later for estate planning or business, then it should be what you select. There is no right decision for everyone. It's important to consult an agent to discuss your needs to select the right policy for your situation.

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