Types of Insurance

Life insurance

Life insurance provides a financial payment to your beneficiary upon your death. When you buy a life insurance policy, you name a beneficiary—the person (or persons) who will receive the payment. The insurance company pays the amount of your insurance to the beneficiary after your death.

Some life insurance policies have a cash value—that is, an amount that the insurer will pay you if you cancel your policy. Others do not.

Definitions

  • Beneficiary: The person (or persons) who will receive an insurance payment
  • Cash value: A cash amount that the insurer pays to you if you cancel your policy

Life insurance companies generally require you to complete a detailed medical questionnaire or exam before approving you for a policy. You should answer the questions honestly to avoid problems when making a claim. If the insurer conducts an investigation after you or your beneficiary submits a claim and discovers that the medical questions were not answered properly, or that you did not include material facts, the insurer could void the contract and refuse to pay the claim, even though you have already paid premiums.

Life insurance may include disability insurance. For more information on disability insurance, see the section on Health insurance.

Life insurance may also offer benefits for estate planning. See the Retirement and Pensions module and the Financial Planning module for more information.

Term and permanent life insurance

There are two main types of life insurance: term and permanent.

 

Term life insurance

Permanent life insurance

How it works

  • Provides coverage if you die during the term or duration of the policy.
  • Once the term ends, the coverage ends, and you or your beneficiaries will not receive any payment. Term life insurance is not intended for full life coverage.
  • If you are renewing your term coverage, you may need to complete a new medical questionnaire or exam.
  • Provides coverage throughout your lifetime.

Cost of premiums

  • Are generally less expensive than permanent life insurance premiums at the beginning of the term.
  • Premiums are usually fixed for the length of the term, often at intervals of five or ten years.
  • Term policies frequently expire before the person dies. Then premiums may increase when you renew the policy and may become very expensive later in life.
  • At first, premiums are usually higher than for term life insurance, but may be lower than term premiums in later years.

Cash value

  • Does not usually accumulate a cash value.
  • Generally accumulates a cash value that is returned to you if you cancel your policy.
  • Most policies will also allow you to take out a loan against the value of your policy.
  • Loans that you have not repaid reduce both the death benefit and any cash value.

Permanent life insurance

Within the category of permanent life insurance, the two most common types are whole life and universal life.

  • Whole life insurance guarantees the amount of your premiums. Your premiums will not change as you get older, and your policy will often have a guaranteed minimum cash value. The amount paid out upon your death is also guaranteed.
  • Universal life insurance combines life insurance with an investment account. A portion of your premium is allocated to your life insurance and a portion to your investments. The portion allocated to life insurance increases over the term of the policy. The investment account has a cash value, and the increase in value of the investment portion is sheltered from tax. Withdrawals, as well as loans, may be permitted.  With universal life insurance, you can increase or decrease your premiums as permitted by your policy. You can also select how your premiums are invested. The death benefit and cash value of your investment account may increase or decrease, depending on the types of investments you choose and the returns on those investments. Your premiums could increase if returns on your chosen investments fall.