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Life Insurance: Understanding the 5 Types of Policies

Life insurance can be tricky to purchase. Consumers shopping for life insurance policies for the first time are sometimes overwhelmed by the choices available to them. Typically, you can purchase a life insurance policy in 4 ways: Whole Life Insurance, Term Life Insurance, Universal Life Insurance, Variable Life Insurance and Variable Universal Life Insurance. Each of these types of life insurance policies varies in the both the costs and how payments are structured.

Whether you are looking for a cheap term life insurance policy or a secure whole life insurance policy, you should be aware of the differences between the types of insurance. We offer this quick guide to life insurance to help you understand the differences.

Whole Life Insurance Policy

Whole Life Insurance policies are in effect for the insured’s entire life. The primary benefit of whole life insurance is that the life insurance policy does not expire and guarantees that the beneficiary will receive payment upon the death of insured.

Whole Life Insurance policies require payment every year, unless the policy allows for large payments up front that may cover the entire cost of the premium. Whole Life Insurance policies can generally be cashed out prior to the insured’s death.

Term Life Insurance Policy

Term Life Insurance policies offers coverage for a set period of time, called “the term” rather than for the insured’s entire life, as you find with Whole Life Insurance. Consumers like term life insurance because one of the trade-offs of not being covered for the entire life is that premiums are lower than they would be for whole life insurance. However, there is no cash value to a term life insurance policy.

Universal Life Insurance Policy

Universal Life Insurance is similar to Whole Life Insurance in that it provides coverage for the entire life and it builds up a cash value over the life of the policy. The primary difference between Universal Life Insurance policies (also called "Flexible Premium Adjustable Life Insurance") and Whole Life Insurance is that a Universal Life Insurance policy offers a more flexible premium payment option, and the ability to change the death benefit during the course of your life. For example, the insured can lower her premiums if she wishes (or increase her premiums) with a resulting change in the value of the cash value of the policy.

Variable Life Insurance Policy

Variable Life Insurance is similar to Whole Life Insurance, as it has a cash value and provides coverage for the entire life. The key difference is that with a Variable Life Insurance policy, the insured has the option of how the insurance company invests the premiums. While there is additional risk in this approach, investments that grow over time can result in a higher death benefit. Of course, investments that shrink with Variable Life Insurance can result in a lower-than-expected death benefit (though typically there is a minimum benefit threshold).

Variable Universal Life Insurance Policy

Variable Universal Life Insurance is basically a combination of Variable Life Insurance and Universal Life Insurance. A Variable Universal Life Insurance policy allows the insured to choose how premiums are invested, the amount of premium he wants to pay, and the death benefit. There is more risk in Variable Universal Life Insurance than in other types of life insurance, and the premiums are generally higher. Those who do prefer Variable Universal Life Insurance like it because they like to have as much control as possible over their life insurance policies.