Term insurance provides a specified death benefit for a specified period of time. At the end of the term, which may be a set number of years or may be at a certain age, the policy will lapse. Variable term policies will change during the term of the policy, either decreasing the amount of coverage as the insured gets older, increasing the cost as the insured gets older, or both. Level premium term policies lock in the cost of the coverage for a specified number of years (typically ten to twenty) before the premiums can be increased or coverage reduced. Some term insurance policies can be converted to permanent insurance with no additional medical requirements and some policies can be automatically renewed upon the expiration of the original term.
The primary advantage of term insurance is that the purchaser can get more coverage for less money than with permanent insurance. This makes term insurance especially attractive to young families with needs for housing, education and costs of raising a family. Term policies become less attractive with age because premiums for older persons can be very expensive. There is also no cash value build-up in a term insurance policy, so that the only benefit is the death benefit, which is only collected if the insured person dies while the policy is in force.
Permanent insurance continues to provide coverage for as long as you continue to pay premiums. The premiums are based on your age at the time the policy is purchased, and typically do not increase with age. Because the premiums do not increase with age, the cost of coverage is initially more expensive than term insurance. The cost of a typical policy is significantly more than term insurance because the policies accumulate cash value, which may be refundable upon surrender of the policy. While the policy is in place, the cash value can be used as a source for an inexpensive loan or it can be used to pay premiums.
Whole Life insurance has a fixed guaranteed interest rate and results in guaranteed cash values.
Universal Life insurance is an "interest driven" type of policy. There is a low guaranteed interest rate, but the policy is generally purchased with an expectation of higher returns. If returns are low on a continual basis, the policy may require supplements to the premiums. Universal life policies allow limited changes in the death benefit and the amount and frequency of premium payments.
Variable Life insurance has no guarantees on either interest rate or cash value, with perhaps a minimum guaranteed death benefit. The death benefit and the cash value fluctuate with the performance of an underlying portfolio of investments selected by the purchaser.
Variable Universal insurance combines the flexible premium and death benefit of a universal life policy with the investment flexibility and risk of a variable life policy.