A: There are two basic categories of life insurance, term and permanent. Term may be appropriate if you only need protection for a limited time, such as the life of a mortgage or the time leading up to and the completion of a college education. Permanent may be appropriate if you need lifetime coverage. However, between the two, the life insurance industry has also created a myriad of solutions for different needs.
Below I will describe the types of life insurance products, based on the order of premium costs from low to high.
As its name implies, Traditional Term life insurance covers you for a specified term, with 10, 20 and 30 years being the most common. Premiums are fixed over the term of the policy. It provides the greatest amount of coverage for the lowest premium.
Return of Premium Term
As its names implies, Return of Premium (ROP) Term life insurance covers you for a specified term, but then returns all of your premiums if you outlive the policy. Premiums are fixed over the term of the policy. It provides the second greatest amount of coverage for the second lowest premium.
Guaranteed Universal Life
Guaranteed Universal Life is a type of permanent life insurance that offers fixed premiums over your lifetime. Unlike most types of permanent life insurance, this type of policy is not designed to build up cash value. It provides the third greatest amount of coverage for the third lowest premium, but is the lowest priced permanent life insurance.
Variable Universal Life
Variable Universal Life (VUL) is a type of permanent life insurance that offers flexible premiums based on how underlying investments inside the policy perform. Unfortunately the investments inside the VUL can drop, decreasing the policy’s cash value and death benefit. Combining something that is intended to be your safest financial instrument (life insurance) with risky investments (stocks and bonds) can be a recipe for disaster. It provides the second least amount of permanent coverage for the second highest premium.
Index Universal Life
Index Universal Life (IUL) is a relatively new type of permanent life insurance that offers flexible premiums based on how stock market indexes perform. It provides a floor (typically 0%) so your policy's cash value will not drop even the market index might drop, but at the same time it also imposes a cap so if the market index soars your upside is limited. IUL is more expensive than VUL from cost perspective and is not suitable for ordinary families.
Whole Life is a type of permanent life insurance that can offer fixed premiums. As the insurance company generally charges significantly higher premiums than the actual life insurance costs in the early years of the policy, cash value builds in this type of policy. The accumulated cash value can be used to pay future premiums. It provides the least amount of permanent coverage for the highest premium.
Get the Right Type of Life Insurance
Purchase the right life insurance product reduces the financial and psychological burdens that can cause hardship when the need for the proceeds arrives. Establishing the right amount and right type of insurance allows you to control what you want to protect in the most cost effective matter. Like most insurance, the earlier you start your policy the lower the cost of the policy. Premiums for the same level of coverage can vary greatly between carriers.