Life insurance: the basics about term life insurance and whole of life insurance

Not sure how the different types of life insurance vary? If you are the main breadwinner and are considering taking out life insurance then it pays to get familiar with some basic terms.

Term life insurance or a permanent life policy?

First of all, there are two different categories of life insurance available - term life and permanent life insurance. Term life insurance is temporary up to an agreed term (say 65 years old) - each year a premium is paid to cover the risk of death during that year and has no cash value. The only way for dependants to collect anything is for you to (yikes) die before the term of the insurance is reached.

The permanent life insurance option provides cover throughout your lifetime with no maturation date. The policy never ends as long as the premiums are paid, so at 99 years old you could still be covered, for example. In addition, this type of policy has a savings aspect, meaning that the policy builds cash value over the life of the policy. This is an amount of money you will receive if the policy lapses or is cancelled.

The different life insurance categories

It is not as simple as just choosing between term and permanent life insurance though - there are also categories within these.

Term life insurance categories include:

• Annually renewable term life insurance, which gives you the right to renew your coverage at the end of each year. This right continues for a specific number of years or until you reach an age specified in the policy. This can be unpopular, as the premiums can increase each year as the risk of death becomes greater.
• Guaranteed level term life insurance has premiums that are designed to remain level for a longer period, say five or even 30 years. These policies are popular because they're inexpensive comparatively and can provide lengthy cover. Without a guarantee, an insurer can raise your premiums, unlike this option.
• Return of premium term life insurance - offers a refund of premiums at the end of a term period, if you're still, yep, alive. It can be more expensive, but the premiums are fairly level and policies are available for up to 30-year terms.

Permanent life insurance categories include:

• Whole life insurance, which is designed to remain in effect throughout one's lifetime. Generally, the premiums remain the same throughout your life. These policies actually develop cash values, which you can dip into through surrenders or policy loans.
• Universal life insurance - differs from whole-of-life insurance in that it separates the elements of the death benefit, expense and cash value. This allows you to modify the face amount or your premium in response to changing circumstances, and
• Survivorship life insurance - pays a death benefit for the later death of two insured individuals, usually a husband and wife.

Most people opt for term life but some people prefer to see their policy as another investment and choose a permanent policy. Yup, there are various different versions. But, if you're still in the workforce, your most valuable asset is you and your ability to earn an income - and taking out life insurance could be worthwhile.