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? .