Types of Life Insurance

Term? Whole? Universal? Find out what these terms mean and how they can work for your family.

Understanding key terms will help you best protect your family.

Shutterstock

So, you’ve decided to buy life insurance. But which type of life insurance should you buy? It depends on your budget and your needs. Here’s a look at the various types of life insurance available and some major differences among them.

What is term life insurance?

Term life insurance lasts for a set time period, or “term,” from 5 to 30 years. It typically costs less than other types of life insurance, and it allows you to protect your loved ones for a specific period of time (such as the years your kids are in school).

The premium is fixed for the duration of the initial policy term period. When the initial term period ends, you can extend your coverage by renewing it at a higher premium up to a certain age. Term life insurance with low premiums and a death benefit up to $5 million is available through AAA.

What’s the difference between term and permanent life insurance?

Life insurance coverage falls into one of two categories: term or permanent. A term life insurance policy lasts for a set number of years. A permanent policy life insurance, such as a whole or universal, lasts for the insured person’s lifetime.

What is whole life insurance?

Whole life insurance lasts, well, your whole life. Although it’s typically pricier than term life insurance, the premium and death benefit remain the same for the duration of the policy, as long as you pay your premium on time. This type of policy builds cash value over time. You can borrow money against this cash value. Your coverage amount will be reduced by any outstanding loans and debt.

What is universal life insurance?

Universal life insurance is similar to whole life, only more flexible. Like whole life insurance, universal life insurance can build cash value over time and as long as the premium minimums are paid, the policyholder is covered for life. This type of policy can be used to provide for your loved ones in the event of your death and, unlike a whole life policy, it may allow you to adjust your premiums or death benefit based on your current situation. 

How do the different types of life insurance policies pay out?

With term life insurance, if you, as the insured person, die during the term of the policy, the death benefit—which is generally tax-free—is paid to your beneficiaries.

With a whole life insurance policy, if you are the policy owner (policyholder), you can borrow money from its accrued cash value. If you borrow money against your policy, you’ll pay interest to the insurer—and, when you die, your beneficiaries will only receive whatever benefit remains after the loan is repaid. However, if you pay the entire loan back before you die, your beneficiary will receive the full death benefit.

universal life policy can accumulate cash value based on the current market or minimum interest rate. The policy owner can borrow against the cash value, generally tax-free. This cash value can be accessed for financial help during emergencies, or to supplement retirement income. With a covered claim, AAA Life policy pays a death benefit to your beneficiaries which is equal to either your policy’s face value or an increasing amount equal to the face value plus your cash value amount.

Exceptional coverage. Expert service. Extra savings. AAA Life Insurance.

Life insurance underwritten by AAA Life Insurance Company, Livonia, MI. AAA Life Insurance Company is licensed in all states except NY. CA Certificate of Authority #07861. Products and their features may not be available in all states. Insurance products in California offered through AAA Northern California Insurance Agency, License #0175868, in Nevada by AAA Nevada, in Utah by AAA Utah, in Arizona through AAA Arizona, Inc., License #8301727, and in Wyoming through AAA Mountain West Inc., License No. 172603. The provider of AAA Auto and Home Insurance is CSAA Insurance Group, a AAA Insurer. All policies are subject to policy terms, underwriting, guidelines and applicable laws.