Different types of life insurance policies have been designed to meet different needs and goals and to accommodate the unique circumstances and preferences of individual policyholders,  such as to provide financial security for loved ones in the event of the policyholder’s death, to cover funeral and burial expenses, to pay off outstanding debts and mortgages, and to fund future expenses such as children’s education or retirement.

Yet despite the wide range of options that exist, it’s safe to say that at the most basic level, life insurance can be broken down into two major categories: term life insurance and permanent life insurance. This is why, we’re going to begin our discussion of different “types” of life insurance by first discussing term and whole life insurance and then describe some of the differences of such policies as well.

Type of life insurance policies which will be discussed here in this article will include:

• Term Life Insurance
• Whole Life Insurance
• Universal Life Insurance
• Indexed Universal Life
• Variable Universal Life
• Survivorship
• Burial Insurance
• Simplified Issue
• Guaranteed Issue
• Fully Underwritten

Life Insurance Policy Types

Term Life Insurance

Term life insurance is a type of life insurance that provides coverage for a specific period of time or term. These types of life insurance policies are relatively simple to understand because, simply put, if the policyholder dies during the term, the policy pays a death benefit to the designated beneficiary.

However, if the policyholder does not die during the term, the policy expires and does not provide any payout. Because of this, term life insurance is typically less expensive than permanent life insurance, which provides lifelong protection and includes an investment component.

Term life insurance is often used to meet temporary needs, such as covering a mortgage or providing financial support for dependents. It is also a good choice for those who have a limited budget and want to ensure that their loved ones will be financially protected during the most vulnerable time of their lives.

A term life insurance policy can last from a few years to several decades, and the premium is typically fixed for the duration of the term. Some term life insurance policies may also include the option to convert to a permanent policy at a later date and/or a guaranteed renewable option (which sounds great, but we’ll get into that in a moment).

Types of Term Life Insurance

There are several types of term life insurance available to meet the diverse needs and goals of consumers. Some common types of term life insurance include:

Level term life insurance:

Level-term life insurance is a type of term life insurance that provides a death benefit that remains unchanged for the duration of the term. The premium is typically fixed for the term as well.

This means that the policyholder pays the same premium for the entire term of the policy, and the death benefit remains the same regardless of when the policyholder dies during the term. Level-term life insurance is often used to provide financial protection for a specific period of time, such as to cover a mortgage or provide financial support for dependents.

It is a good choice for policyholders who want the stability of a fixed death benefit and premium and who want to ensure that their loved ones will be financially protected in the event of their death.

Decreasing term life insurance:

Decreasing term life insurance is a type of term life insurance that provides a death benefit that decreases over time. The death benefit of a decreasing term life insurance policy is typically tied to a loan or mortgage and is designed to decrease in value as the loan or mortgage is paid off.

This type of policy is often used to help provide financial protection for a borrower’s family or loved ones in the event of their death while they are still paying off a loan or mortgage. Decreasing term life insurance is typically less expensive than other types of term life insurance since the death benefit decreases over time.

However, it is important for policyholders to carefully consider whether a decreasing term life insurance policy is the right fit for their needs, as the death benefit may not provide sufficient financial protection if the policyholder dies after the benefit has decreased significantly. Policyholders should also be aware that the premium for a decreasing term life insurance policy may increase over time, even if the death benefit is decreasing.

That said, in our experiences here at IBUSA, we have found that the price difference between a level term life insurance policy and a  decreasing term and level term life usually isn’t significant enough for most clients to elect these types of life insurance policies, so it makes sense to get a level term product where the death benefit remains fixed for the duration of the policy.

Convertible term life insurance:

Convertible term life insurance is a type of term life insurance that allows the policyholder to convert their policy to a permanent life insurance policy without the insurance company reviewing their health or any other underwriting criteria.

This means that the policyholder has the option to switch to a permanent policy during the term of the policy (some policies may have exclusions regarding when an insured can covert their policy) without having to undergo a new medical examination or provide additional information about their health or other circumstances. Convertible term life insurance policies may be a good choice for policyholders who are initially unable to qualify for or afford a permanent life insurance policy but who want the option to convert to a permanent policy in the future.

Convertible term life insurance can also be a good choice for policyholders who want the flexibility to change their coverage as their needs and circumstances change over time. An additional benefit to owning a convertible term life insurance policy is that if you are diagnosed with a medical condition that might prevent you from being able to medically qualify for a new life insurance policy in the future, converting your existing term life insurance policy to a permanent whole life policy could be an ideal option for the insured.

Guaranteed renewable term life insurance:

Guaranteed renewable term life insurance is a type of term life insurance that allows the policyholder to renew the policy for an additional term without the insurance company reviewing their health or any other underwriting criteria.

This means that as long as the policyholder pays the required premiums, the insurance company must offer them the option to renew the policy, regardless of any changes in their health or other circumstances.

“Which is a fantastic benefit to the insured!”

Guaranteed renewable term life insurance policies may be a good choice for policyholders who are concerned about the possibility of being declined for coverage due to changes in their health or other factors.

However, it is important to note that while the policyholder has the right to renew the policy, the insurance company has the right to increase the premium at each renewal. This means that the premium for a guaranteed renewable term life insurance policy may (almost certainly will) increase over time, even if the policyholder’s health remains the same.

Additionally, we should add that you will be renewing on a YEARLY term, which means that your price will likely increase each year you own the policy, which could force you to drop it due to rising costs.

Annual renewable term

Annual renewable term life insurance is a type of term life insurance that provides coverage for a period of one year and allows the policyholder to renew the policy each year. The premium for this type of policy is typically adjusted annually based on the policyholder’s age and health.

Annual renewable term life insurance is often a less expensive option than other types of term life insurance since the policy is only in effect for one year at a time. However, it is important for policyholders to be aware that the premium for an annual renewable term life insurance policy may increase significantly each year, especially as the policyholder gets older or if their health declines.

This can make annual renewable term life insurance a more expensive option in the long run compared to other types of term life insurance.

What Happens When the Term Policy Ends?

When a term life insurance policy ends, the policy expires and does not provide any payout. This means that if the policyholder dies after the policy has expired, the designated beneficiary will not receive a death benefit. If the policyholder is still alive when the policy ends, they may have the option to renew the policy for an additional term, although the premium may be higher at that point.

It is important for policyholders to be aware of the expiration date of their term life insurance policy and to make a decision about whether they want to renew the policy or purchase a new one before the policy ends. And if the policyholder no longer needs the coverage or can no longer afford the premium, they may choose to let the policy expire and not renew it.

In some cases, the policyholder may decide to convert the policy to a permanent life insurance policy or purchase a new term policy to continue their coverage (assuming that their policy will permit this).

Whole Life Insurance

Whole life insurance, also known as permanent life insurance, is a type of life insurance that provides coverage for the policyholder’s entire life and includes an investment component.

This means that the policy not only pays a death benefit to the designated beneficiary in the event of the policyholder’s death but also accumulates cash value over time that the policyholder can use while they are alive.

Whole life insurance is typically more expensive than term life insurance, which only provides coverage for a specific period of time and does not include an investment component. However, whole life insurance can be a good choice for those who want lifelong protection and the ability to build cash value over time. The cash value of a whole life insurance policy can be used for a variety of purposes, such as to pay premiums, to borrow against the policy, or to supplement retirement income.

Whole Life Guarantees

Whole life is unique in the permanent life insurance marketplace because it provides 3 primary guarantees.

Whole life insurance guarantees include:

• guaranteed fixed premium
• guaranteed death benefit
• guaranteed cash value

Guaranteed fixed premium: A guaranteed fixed premium is a type of premium for a life insurance policy that is fixed and does not change over the term of the policy. This means that the policyholder pays the same premium for the entire term of the policy, regardless of any changes in their age or health.

Guaranteed death benefit: A guaranteed death benefit is a feature of a life insurance policy that guarantees that the policy will pay a specific amount to the designated beneficiary in the event of the policyholder’s death. The death benefit is typically the primary reason that a policyholder purchases a life insurance policy, and it is intended to provide financial protection for the policyholder’s loved ones or dependents in the event of their death.

Guaranteed cash value: A Guaranteed cash value whole life insurance is a type of whole life insurance that provides a guaranteed minimum amount of cash value that will accumulate over time. This means that the policyholder can be assured that the cash value of the policy will reach a certain level, regardless of the performance of the underlying investments.

Pros and Cons of Whole life vs Term Life

Pros of whole life insurance:

• Provides lifelong protection
• Accumulates cash value over time
• It can be used towards infinite banking strategies which refers to using the cash value accumulation in your policy to pay down debts, start a business, buy real estate, etc. and then recapture your interest for further cash value accumulation.
• Can be used as a source of funds for a variety of purposes, such as paying premiums, borrowing against the policy, or supplementing retirement income
• Can be used to cover funeral and burial expenses, pay off outstanding debts and mortgages, or fund future expenses such as children’s education or retirement

Cons of whole life insurance:

• Typically more expensive than term life insurance
• Cash value may not accumulate as quickly as expected, depending on the performance of the underlying investments
• They may have higher premiums and fees, which “in theory,” reduce the policy’s cash value and death benefit.

Pros of term life insurance:

• Typically less expensive than whole life insurance
• Can be used to meet specific, temporary needs, such as covering a mortgage or providing financial support for dependents
• Can be a good choice for those with a limited budget or who only need coverage for a specific period of time

Cons of term life insurance:

• Only provides coverage for a specific period of time and does not accumulate cash value
• If the policyholder dies after the term has expired, the designated beneficiary will not receive a death benefit
• May not be a good choice for those who want lifelong protection or the ability to build cash value over time

Universal Life Insurance

Universal life insurance is a type of permanent life insurance that provides lifelong protection and includes an investment component. It combines the protection of term life insurance with the ability to build cash value over time, like whole life insurance.

Universal life insurance policies are flexible and allow policyholders to adjust their premiums and death benefit within certain limits, depending on their needs and circumstances.

The cash value of a universal life insurance policy is invested in a range of options, such as stocks, bonds, and money market instruments. It can be used for a variety of purposes, such as to pay premiums, to borrow against the policy, or to supplement retirement income.

Universal Life vs. Whole Life Insurance

Universal life insurance:

• Provides lifelong protection and includes an investment component
• Flexible premiums and death benefits, which can be adjusted within certain limits depending on the policyholder’s needs and circumstances
• Cash value is invested in a range of options, such as stocks, bonds, and money market instruments
• Can be used for a variety of purposes, such as to pay premiums, to borrow against the policy, or to supplement retirement income
• Typically more expensive than whole life insurance

Whole life insurance:

• Provides lifelong protection and includes an investment component
• Fixed premiums and death benefit
• Cash value is typically invested in a portfolio of fixed-income and equity investments
• Can be used for a variety of purposes, such as to pay premiums, to borrow against the policy, or to supplement retirement income
• Typically less expensive than universal life insurance

Indexed Universal Life Insurance

Indexed universal life (IUL) insurance is a type of universal life insurance that includes an investment component that is linked to the performance of a stock market index, such as the S&P 500. The cash value of an IUL policy is credited with a percentage of the index’s growth minus any fees or expenses associated with the policy.

IUL policies typically have a minimum guaranteed interest rate, which means that the cash value of the policy will earn at least a certain percentage each year, regardless of the performance of the underlying index. This can provide policyholders with a measure of stability and protection against market downturns.

IUL policies also typically include a cap, which is the maximum percentage of the index’s growth that can be credited to the policy’s cash value. The insurance company typically sets the cap and may change over time.

IUL policies can be a good choice for policyholders who are interested in the potential for higher returns on their life insurance policy’s cash value but who are also concerned about the potential risks associated with investing in the stock market.

Variable Universal Life Insurance

Variable universal life (VUL) insurance is a type of universal life insurance that includes an investment component that is invested in a range of options, such as stocks, bonds, and mutual funds. The cash value of a VUL policy is directly tied to the performance of the underlying investments, which means that the policyholder bears the investment risk.

VUL policies typically offer policyholders a range of investment options to choose from, and the policyholder can allocate their cash value among these options as they see fit. This can provide policyholders with the opportunity to potentially earn higher returns on their cash value, but it also exposes them to the potential for losses if the underlying investments do not perform well.

VUL policies are typically more expensive than other types of life insurance, and they may also have higher fees and charges associated with them. They are generally suitable for policyholders who have a higher risk tolerance and who are comfortable with the potential for market fluctuations to affect the value of their policy.

Survivorship Life Insurance

Survivorship life insurance, also known as second-to-die life insurance, is a type of life insurance policy that covers two people, typically a married couple or business partners, and pays a death benefit to the designated beneficiary only after the second person covered by the policy has died.

Survivorship life insurance is often used to help provide financial protection for the surviving spouse or other dependents after the death of the first policyholder. It can be used to help pay outstanding debts, business buyouts, funeral and burial expenses, fund future expenses such as children’s education or retirement, or provide a source of income for insured beneficiaries.

For business partners, survivorship life insurance provides liquidity to future business owners.

Burial Insurance

Burial life insurance, also known as funeral insurance or final expense insurance, is a type of life insurance policy that is specifically designed to cover the costs of a policyholder’s funeral and burial expenses.

These policies typically have smaller death benefits than other types of life insurance and are designed to help the policyholder’s loved ones cover the costs of a funeral or cremation, as well as any other related expenses such as a headstone or obituary. Burial life insurance policies are typically simpler and easier to qualify for than other types of life insurance, and they may be a good choice for those who have a limited budget or who have been turned down for other types of coverage due to their age or health.

However, it is important for policyholders to be aware that burial life insurance policies may be more expensive than other types of life insurance on a per-dollar-of-coverage basis, and they may also have higher fees and charges associated with them.

Simplified, Guaranteed, and Fully Underwritten

Simplified Issue Life Insurance

Simplified-issue life insurance policies are a type of life insurance that does not require a medical exam as part of the application process. Instead, the insurer will ask the applicant a series of medical questions and may request access to the applicant’s medical records in order to determine their eligibility for coverage.

Simplified-issue life insurance policies are typically faster and easier to obtain than traditional life insurance policies, which require a medical exam as part of the application process. They may be a good choice for those who are unable or unwilling to undergo a medical exam.

Guaranteed Issue Life Insurance

Guaranteed-issue life insurance is a type of life insurance that does not require the applicant to undergo a medical exam or answer any medical questions as part of the application process. These policies are typically available to applicants who may have certain medical conditions or who may be considered high-risk and may not be able to qualify for traditional life insurance coverage.

Guaranteed-issue life insurance policies typically have lower death benefits than other types of life insurance and may have higher premiums and more restrictions on coverage. They may also have a waiting period before the death benefit is paid out, during which time the policyholder must survive in order to receive the full death benefit.

Guaranteed-issue life insurance can be a good choice for those who are unable or unwilling to undergo a medical exam or who have certain medical conditions that may make it difficult to qualify for traditional coverage. However, it is important for policyholders to be aware of the limitations and exclusions of these policies and to carefully review the terms and conditions of a guaranteed issue life insurance policy before purchasing it.

Fully Underwritten Life Insurance

Fully underwritten life insurance is a type of life insurance that requires the applicant to undergo a medical exam as part of the application process. The insurer will also review the applicant’s medical history and may request access to their medical records in order to determine their eligibility for coverage.

Fully underwritten life insurance policies are typically more comprehensive. They may offer higher death benefits and more options for customization than other types of life insurance, such as simplified issue or guaranteed issue policies. However, they may also be more expensive, and the applicant may be required to provide additional information or documentation as part of the underwriting process. Fully underwritten life insurance can also be a good choice for those who are in good health and who want the most coverage for their premium dollar

Now we’ll be the first to admit that we’ve gone over a ton of information here in this article, and we’re sure that if you’ve made it this far you probably have a lot of questions you would like to ask, which is great!  Because here at IBUSA, we love helping people find the insurance that they need.

And, because we offer a wide variety of different life insurance products from dozens of different insurance carriers, we’re sure we should have what you need.  So, when you’re ready, give us a call, and let us show you what we can do for you!