The Different Types of Life Insurance Explained in 2021
Despite most consumers expressing a willingness and desire to financially protect their family from hardships after the death of a breadwinner, almost half of those in the U.S do not own life insurance. According to LIMRA, there are 102 million uninsured and underinsured Americans who believe they need to buy life insurance or increase their coverage, and only 54% of adults own some type of life insurance.
While many have good intentions for those they leave behind in death, too few individuals take proactive steps to ensure their family’s financial stability. One of the reasons for this is confusion due to the myriad different types of life insurance offered. Below is a synopsis of the various types of life insurance policies available and how they differ.
Term Life Insurance
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Term life insurance is the simplest form of life insurance. It pays only if death occurs during the term of the policy, which is usually from one to 30 years. Most term policies have no other benefit provisions. There are two basic types of term life insurance policies:
- Decreasing term: the death benefit drops, usually in one-year increments, over the course of the policy’s term.
- Level term: the death benefit stays the same throughout the duration of the policy.
In 2019, 71% of consumers who owned life insurance had a term life policy, up from 63% in 2017. Because of the policy’s simplicity and lower costs, it has traditionally proven to be the most popular of all types of life insurance policies.
Permanent Life Insurance
Permanent life insurance pays a death benefit whenever the policyholder dies—even if they live to 100 or more. There are three major types of permanent life insurance: whole life, universal life, and variable universal life, and there are variations within each type.
- Whole life: Whole life can provide lifelong coverage. It combines an investment account, referred to as “cash value,” and an insurance product. Interest on a whole life policy is usually adjusted annually. Whole life also offers three kinds of guarantees:
- A guaranteed minimum rate of return on the cash value.
- The promise that your premium payments won’t go up.
- A guaranteed death benefit that won’t go down.
- Universal life: Similar to whole life, universal life is designed to last the entire life of the policyholder and will accumulate cash value that may be borrowed against, tax-free. Universal life policies tend to be more flexible. As a result, universal life insurance premiums are typically lower during periods of high-interest rates than whole life premiums, often for the same amount of coverage. Interest paid on universal life policies is usually adjusted monthly. This can result in large fluctuations of the policy’s cash value during periods of rising interest rates.
- Variable universal life: Like the above types of permanent life insurance, variable universal life (VUL) insurance offers lifelong protection as long as premiums are paid. And similar to universal life, policyholders have the ability to skip a premium payment if the cash value of their policy can cover the costs. And as with variable life insurance, VUL policies allow the owner invest in underlying sub-accounts offering a variety of investment options, which are typically tied to financial markets, meaning your policy value may fluctuate with the market. The main difference between VUL and universal life policies is that VULs offer more investment options.
Although each of these types of life insurance policies has its differences, they all focus on providing your loved ones with the money they’ll need when you die.
About Abacus Life
Abacus Life Settlements has been a leading buyer of life insurance policies in the U.S for the last 16+ years. With over 10$ billion in policy face value purchased, we have helped thousands of clients maximize the value of their life insurance. We provide white-glove services to financial advisors and policy owners. Want to learn about the true value of your Policy? Check out our Market Value Calculator to get a free estimate.
The Different Types of Life Insurance Explained in 2021 | Abacus Life