Thinking about life insurance and what your needs may be is not something people look forward to. Like drafting your will, it is grim to think about one’s passing. Yet, it is very important and the responsible thing to do, especially when you have others who depend on you. There are 3 main types of life insurance. Each one will have different subsets, but these will give you a broad overview of what they offer.

Term

Term life is the simplest form of life insurance. You pick a term you want to cover, i.e. 1, 5, 10, 20, 30 years, and an amount of coverage you would like. The term is flexible for your needs as is the coverage. This is the most affordable type of life insurance. You pay a premium (month, quarter, year, in full) for the duration of the term. The premium can increase during the term or stay the same, so you’ll want to know which one it is before you sign anything. If you pass during the term, the coverage amount is paid to your beneficiaries. If you do not pass during the term, nothing happens. You do not receive any sort of refund in your premiums paid.

Whole

Whole life has a few similarities to Term. The main difference is a small part of the premium goes toward a “cash value”. The majority of the premium will go to fees related to maintaining coverage. This cash value is a savings account. Because of this, your premiums are going to be 6-10 times more than a term policy for the same death benefit. If you pass during the term, the coverage amount is paid to your beneficiaries like Term. Unlike Term, if you do not pass during coverage you will receive the cash value saved up over the years.

Variable

Variable life is like Whole in many regards. It has a cash value component like Whole does. Where the cash value for Whole is a savings account, the cash value for Variable is more of an investment vehicle. The cash value is invested in the stock market through subaccounts managed by the insurance company, which allow for growth of your cash value. In theory, your cash value at the end of the policy can be greater than at the end of a Whole policy. Investment choices are limited to what the insurance company provides.

There is flexibility on the premium amount based on how investments have done. There are also options to take loans against the insurance policy. The death benefit may also grow if investments have done well. If investments have performed poorly, a policyholder may need to increase premium payments to keep the policy in force and/or maintain a specific death benefit level. A Variable policy will have the highest premiums of the 3 described here.

Which One Is For You?

You may be asking yourself “so which one is for me?”. Well, that depends entirely on your specific situation. If you aren’t sure what is best for you, I recommend you consult with a Fee-Only Financial Advisor. This is because a Financial Advisor or Insurance Agent who earns commissions may have a bias to one insurance product or another because their commission will be higher if they get you to buy it. A Fee-Only Financial Advisor will be able to give you unbiased advice.

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About The Author

Shaun Melby, CFP® provides fee-only financial planning and investment management services in Nashville, TN through his company Melby Wealth Management. Shaun has over 15 years of experience as a financial advisor in Nashville. Shaun created Melby Money to educate the public about finances.