Types of Life Insurance
Although the life insurance industry has churned out hundreds or even thousands of variations of life insurance, all boil down to just three types of life insurance. Taken a step further, all different life insurance types are really just variations of one single kind of life insurance.
Three Major Types of Life Insurance
The 3 main types of life insurance are Term Life insurance, Whole Life Insurance, and Variable Life Insurance, although you will see them broken down in other ways depending upon the circumstances.
Term Life insurance is the cheapest form of life insurance. Not surprisingly, it also provides the least amount of coverage.
Whole Life Insurance is the most expensive form of life insurance coverage. Like the name implies, whole life covers a person for their entire life. That also means that whole life is the only form of life insurance that is guaranteed to pay out when you die.
Variable Life Insurance comes in several forms, but the most common is known as variable universal life insurance or VUL. VUL is the bread and butter of financial planners and financial advisors who work for insurance companies. By positioning VUL as not just life insurance, but also as a long-term investment, insurance company financial representatives can offer their clients investment advice without worrying about diverting too many assets from the company's primary products which are insurance.
Main Differences of Life Insurance Types of Coverage
For the simplest explanation of the kinds of life insurance, one need examine what kind of coverage each type of life insurance offers.
Basically, term life insurance covers a person for a set term or period of time. For example, 10-Year term life insurance covers a person for 10 years. In other words, if the policy holder dies within 10 years, the policy will pay out. Otherwise, no payout is made and no premiums are refunded.
Whole life insurance covers a person for their entire life. In practice, most whole life insurance policies actually cover a person until their 100th birthday. Once a person turns 100 years old, many life policies just pay out at that point.
Variable life insurance is more complicated. Theoretically, VUL covers a person for their entire life. HOWEVER, that coverage is based upon the underlying investments within the policy performing at a minimum level. In other words, if the investments do not do well enough, VUL will NOT cover a person for their entire life, unless they make additional premium payments to keep the policy in force.