What are the types of insurance policies?
There are two major categories of life insurance: term life and permanent (cash value) life insurance. Within the two broad categories are many types of policies that have been developed over the years in response to consumer demand, market conditions, and changes in the tax laws.
Term life insurance
Term life insurance (also called pure insurance) policies provide life insurance protection for a specific period of time or term. If you die during the coverage period, the beneficiary named in your policy receives the policy death benefit. If you don’t die during the term, your beneficiary receives nothing. At the end of the coverage period, you must either renew your coverage or apply for a new policy. Term life insurance is often compared to automobile insurance: You must renew it at the end of every coverage period. If you get into an accident, you collect on the policy, but if you don’t have a claim, you don’t get your money back. Term insurance is available for different time periods ranging from one year to many years.
Permanent (cash value) life insurance
When you buy permanent insurance, the policy provides insurance protection for your entire life as long as the policy remains in force (meaning the premiums have been paid and the policy hasn’t lapsed or been canceled). In addition to the insurance protection provided by permanent life insurance, this type of policy also builds internal cash values.
Caution: Guarantees are subject to the claims-paying ability of the insurer.
Caution: Variable life insurance and variable universal life insurance policies are offered by prospectus, which you can obtain from your financial professional or the insurance company. The prospectus contains detailed information about investment objectives, risks, charges, and expenses. You should read the prospectus and consider this information carefully before purchasing a variable life or variable universal life insurance policy.
Cash value life insurance covering one life
|Policies Covering One Life|
|Policy||Premium Characteristic||Cash Value Characteristic|
|Whole life||Fixed, level||Guaranteed rate|
|Ordinary level premium whole life||Fixed, level||Guaranteed interest|
|Limited-pay whole life||Fixed, level with shorter payment term||Guaranteed interest|
|Current assumption whole life||Premium may change, Guaranteed maximum||May change. Guaranteed minimum interest|
|Variable life||Fixed, level||Returns based on investment performance. Not guaranteed|
|Adjustable life||Can be adjusted by policyowner||Balance varies depending on premium payments. Guaranteed minimum interest|
|Universal life||Flexible at option of policyowner||Balance varies depending on premium payments. Guaranteed minimum interest|
|Variable universal life||Flexible at option of policyowner||Balance varies depending on premium payments. Returns based on investment performance. Not guaranteed|
Cash value life insurance covering more than one life
|Policies Covering More than One Life|
|Joint life (first to die)||Available in many permanent policy types. Death benefit paid at first death.|
|Survivorship||Available in many permanent policy types. Death benefit at death of last person covered Premiums continue until death of last person covered.|
Policy types subject to special tax rules
Congress has enacted certain tax laws to limit the use of life insurance policies as tax-preferred investment vehicles. When a policy fails to meet certain insurance definitions and criteria, access to the cash value may be subject to unfavorable tax treatment and penalties.
|Policy Types Subject to Special Tax Rules|
|Modified endowment contract (MEC)||Classification can occur when policy excessively funded in early years or material changes to the policy occur. Cash value loans and withdrawals subject to unfavorable tax treatment and penalties.|