What are the main types of life insurance available?

In the United States market there are two basic types of life insurance: term life insurance and permanent life insurance (whole life insurance. The latter is in turn divided into several categories, which would be insurance permanent life insurance (traditional whole life), variable life insurance (variable whole life) and universal life insurance (universal life) In 2003 there were 6.4 million individual term life insurance policies, while of permanent type they reached about 7.1 million policies.

And as you might imagine, individual insurance policies are different from insurance policies that are sold in groups or for groups. Here, an explanation of the two basic types of individual life insurance.

Term life insurance
This type of insurance is the simplest of life insurance. The policy makes a payment when the insured person dies during the time or term of the policy, which can range from 1 to 30 years. Most term insurance does not include other payment provisions.

There are two different ways to purchase term life insurance: level term life insurance and declining term insurance.

Level Term Life Insurance – Means death benefits stay the same for the life of the policy.
Declining term life insurance: implies that death benefits vary and decrease over the years of the policy, usually at one-year intervals until the final term of the policy.
In 2003, almost all term policies (97% of them) were level-type policies, that is, the benefits did not decrease with the passage of time from the policy.

There is more detailed information that you can see in the article The different types of term policies.

Permanent life insurance
Permanent life insurance pays benefits in the event of death, no matter how old the insured person lives, even if they live to 100 years. There are three basic types of this insurance and each of them has its variations.

Traditional permanent life insurance: the coverage of this insurance, that is, the amount of benefits payable after the death of the insured, and the price or amount of the monthly premium remain level, that is, it will not change during the period that the policy is current.
The cost of the policy is calculated depending on the insured amount: for every thousand dollars of coverage there will be an amount X to pay as a premium. The cost per thousand dollars of coverage increases with the age of the insured person and obviously the coverage of a person who is over 80 years of age can become very expensive.

The insurance company may decide to charge a monthly or annual policy that varies each year, but this would be very difficult for most people to maintain, so they average the cost of premiums and charge the same price from the beginning of coverage. Thus, the coverage premiums will be the same from the beginning to the end of the policy. The initial premiums will be more expensive than what is required to cover the cost of the policy, so the insurer will invest that superfluous amount in a way that generates profits that will be used to supplement the premium payments when the insured is older and the Premiums would be more expensive than what is paid monthly.

By law, when these “overpayments” reach a certain amount, they must be made available to the policy owners as cash, known as cash value, in the event that the insured decides that you don’t want to continue with the original plan. This accumulated value is an alternative benefit, not an additional benefit of the policy. In other words, the owner of the policy may perceive it as an option, but it is not added to the value of compensation payable to its beneficiaries in the event of the death of the insured.

Variable life insurance and universal life insurance: In the 1970s and 1980s, these two additional types of permanent insurance were introduced to the market. There is more detailed information that you can see in the article What are the different options for permanent life insurance? .

Four reasons to buy life insurance

Life insurance is often viewed as a way to protect loved ones by providing final expenses, real estate taxes, etc. But let’s think beyond that. Who else depends on you and your income?

“One size fits all” can apply to many things, but not to something as important as life insurance. Why you need it and how much you need it depends on your obligations and priorities. Your concerns are probably different from those of your neighbors or friends.

Since life insurance can have a huge impact on both your loved ones and your finances, this topic can be intimidating. To make it easier for you to determine your life insurance needs, here are four starting points to think about.

Who do you want to protect?
Life insurance is often thought of as a way to protect loved ones by providing final expenses, real estate taxes, etc. But let’s think beyond that. Who else depends on you and your income?

Do you have small children at home? Life insurance can help provide money for daycare now and an education for the future. If your children are older, your insurance can help cover tuition payments.

Are you responsible for your parents? If you are contributing to the care of an elderly relative, you should consider how health care bills will be paid if you or your partner dies suddenly.

-1 What do you want to protect?
If you have a mortgage, adequate life insurance can help your family stay in the home and maintain their standard of living.

Even if you don’t have a mortgage, there are probably other assets you want to protect. Life insurance can help your family keep up with car payments or protect your spouse from having to use retirement funds earlier than anticipated.

If you are a business owner, life insurance can help the company you formed continue after you are gone.

-2 Do you want to leave something behind?
Perhaps you would like your legacy to help the next generation to live more comfortably. Life insurance can help you do that.

Life insurance can continue with your contributions to your favorite charitable organization, because some policies allow you to name one organization as your beneficiary.

What is your personal financial plan?
So far, we have focused on what life insurance provides after your death. But did you know that permanent life insurance policies can earn cash value [1] that you can use during your lifetime? Many people like to know that they have access to living benefits, as needed, through credits and withdrawals. So it is fruitful to think about your finances in their entirety when considering the benefits of life insurance.