Life Insurance 101: Your Policy Options Explained

Life insurance may seem simple, but many people who purchase it don’t understand their myriad options.

The two most popular types of life insurance are whole and term, both of which pay your beneficiaries when you pass away. What’s the difference?

Term life insurance pays your beneficiaries if you pass away during the term of the policy. The term can vary. For example, policies can cover five, 10, or 15 years. Premiums on term life insurance are generally the most affordable of all life insurance premiums because the insurance company does not take on the risk that you will outlive the policy.

Whole life insurance pays your beneficiaries when you pass away, period. In other words, it is in effect for your entire life, as long as you pay the premiums.

But this benefit comes with a cost. As you age, your risk level increases, and your premiums are likely to increase as well. This does not appeal to most people, so to make these policies more palatable, some life insurance companies charge you higher premiums earlier in the policy’s term and lower premiums later.

A third type of life insurance is less known to most people. It is sometimes referred to as a separate type of insurance called “return-of-premium term life insurance.” Other times it is referred to as a “rider” or “add-on” to a term life insurance policy.

Regardless of terminology, it is similar to the term life insurance policy mentioned above, but if you haven’t yet passed away when the term expires, some or all of your premiums are returned.

The catch: Return-of-premium term life-insurance policies can be expensive. They typically cost about 30 percent more than term life insurance (but potentially less than whole life insurance).

Additionally, not all insurance companies offer return-of-premium term life insurance.

If you aren’t sure which kind of policy is best for you, a financial professional can help you decide.