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Types of Life Insurance

There are many different types of Life Insurance that have been developed over many years, which some you are probably quite familiar with, others not so much.

Term Life Insurance

Term Insurance is one of the most common and basic types of protection products.  It usually has the lowest premiums of all the various types for several reasons. First, it does not have any cash build up associated with it. Term Insurance was primarily designed to provide Temporary, shorter-term coverage. Most often it is recommended by Insurance Professionals to cover a home mortgage or to provide higher levels of coverage for life events with the greatest exposure to financial risk for a family or small business.  For example, younger couples with a home mortgage and young children, who have less disposable income, often seek term insurance to protect against lost income from the premature death of a breadwinner. Raising children, along with high costs of housing and education, can financially devastate a young family if enough protection is not in place. Term Insurance is generally purchased for specific periods of time, such as 10 years, 15 years, 20 years, or 30 years, but with a level premium that does not change over this time period. Another version is Indeterminate or Annually Increasing Term, where the amount of insurance usually stays level, but the premium increases each year.  Business owners often use term insurance to fund a Buy-Sell Agreement for Business Succession needs.

Whole Life Insurance

Whole Life Insurance is another common type of protection.  It is, as the name indicates, for one’s whole lifetime, as long as premiums are paid for a lifetime as well.  This kind of protection also carries the highest cost due to the fact that it has a guaranteed cash value build-up feature.  In some cases, it also can pay non-guaranteed dividends if the Insurance Company is structured as a Mutual Company.  Today, most Insurance Companies have made the decision to restructure as Stock Companies, which are publicly held and traded on the open markets.  Any excess earnings like dividends go to the stockholders of those companies and not the policyholders.  Premiums in these types of policies are invested by the company in very conservative accounts, due to strict guidelines placed on these companies by regulators. Insurance regulators require Mutual Companies to hold sufficient funds in reserve to meet the guarantees for these contracts, in addition to how those funds are invested.  The policyholder has no say in any of this.

Universal Life Insurance

The third type of hybrid insurance, most often referred to as Universal Life Insurance, offers another form of permanent protection, and they come in 3 varieties.  Straight Universal Life was one of the first to come on the scene.  UL’s offer flexible premiums and death benefits with a cash accumulation feature where premiums in excess of the Cost of Insurance charges are credited with an interest.  UL’s have fallen out of favor most recently due to some poor early design features and cost assumptions that have proven problematic in the current low-interest-rate environment that has existed for such a long period of time.  Many of these contracts require the policyholder to pay ever-increasing premiums to prevent the policy from imploding.

Guaranteed Universal Life Insurance

The second version of Universal Life Insurance that was introduced later, is the Guaranteed Universal Life Insurance contract.  It offers some of the guarantees of a Whole Life contract, which is usually at a much lower “level” premium and provides some cash accumulation values. GUL is also based on current interest assumptions.  Again, due to the low-interest-rate environment, most companies have stopped offering GUL’s as well.

Indexed Universal Life Insurance

Today, the most popular type of hybrid insurance is known as Indexed Universal Life (IUL).  This version combines some of the best features of all the others.  Its features include:

  • Flexible Premiums and Death Benefits
  • Living Benefits that you don’t have to die to use, for Chronic, Critical, and Terminal Illnesses
  • Cash Value Accumulation crediting based a variety of Indexes, such as the S&P 500
  • Downside Market Protection of the Cash Accumulation
  • Policyholder Premium Allocations, with multiple Indexing Strategies and Participation Rates
  • Unlimited Contribution levels
  • Tax-deferred growth
  • Variety of Loan features

*Values are not actually invested in the stock markets, but interest credits are based on the performance of the various indexes offered.*

Variable Universal Life Insurance

There is a Variable Universal Life Insurance contract version that is invested in the stock market and the policyholder assumes all the risks associated with this securities-based product.  These contracts require the Agent to hold a Securities Registration.

Charles Kelly Jr., CLF

Founder and CEO

ckelly@keyadvisol.com