Whenever a professional who deals in insurance on a daily basis mentions life insurance, they always discuss it as though it is cut and dry with no real tough decisions to make.
Nowadays, we know what life insurance is and how valuable having a policy can be but this doesn’t make the decision any easier due to the wide array different types of life insurance policies and options available.
With this in mind, we want to make the whole process more accessible which is why we have a complete guide to all of the types of life insurance available.
In addition to running through the types of life insurance options, we will explain the good and bad points about such a policy and even look into the differences between policies in more detail.
After reading this, you should have all the information you will ever need to make a decision for you and your family. Without further ado, let’s get started!
Different Life Insurance Policy Types
Life insurance can be broken down into two major categories: term life and permanent life insurance. Let’s start with term life:
Term Life Insurance
There are two ways to get term life insurance. One way is to go the old fashioned route and take a paramedical exam. However, industry innovators, such as the top no exam life insurance companies, make getting term life insurance easier than ever.
Of all the available options, term life is perhaps the most basic and well known because it offers death benefit protection alone. With no cash value building up, the premiums are affordable and the contract will last for a set amount of time.
Normally, this will be between ten and thirty years with intervals in between. After agreeing to a plan when first setting up the policy, the premium will be fixed. With guaranteed level term the premium will stay at the fixed rate for the duration of the policy.
Upon expiration of the original term, many term life policies offer an annual renewal term up to age 90 or 95. However, the premium will either go up annually or the death benefit will shrink in size.
Upon termination of the insurance contract, if a new policy is required thereafter, a new application will be needed and the process will start again.
As mentioned, term life is one of the most popular policies because it is easy to understand and generally cheap; this is especially true for the younger people who are looking to get life insurance early.
On the flip side, others will avoid this type of policy because it all comes down to timing. If you happen to outlive your policy (which we all hope to do), you will need to reapply for a new plan at this point where premiums could be higher based on your age and health.
The market for term life insurance is now a wide and varied one with many different term life options depending on your needs.
Decreasing term life
For example, a decreasing term life insurance policy will see the death benefit decrease as time goes on and the death benefit reaching zero normally marks the end of the policy. If covering your mortgage is the main reason for a policy, many people opt for this route because it is seems like a great idea because it covers your mortgage. However, most people will discover that decreasing term and level term life are priced similarly, so it makes more sense to get a level term product where the death benefit remains fixed for the duration of the policy.
Annual renewable term
Some people only need term insurance for a specific reason, such as covering a small business loan. For this group of people, annual renewable term might be a better choice because you can get coverage for a year at a time.
Whole Life Insurance
Away from term life insurance, there are a number of permanent life insurance policies, i.e. do not come to an end. With whole life insurance the premium will remain the same for the duration and the policy and will only come to an end after the insured dies (assuming that any premiums due have been paid).
Pros and Cons of Whole life vs. Term Life
For younger generations who expect to outlive their policy, this is a safer choice because they know that the same premium will be expected until death rather than having to set up a new policy later.
Also, there is a cash value component that grows over time and can be used for various things. Taking out policy loans is a great way to access tax free retirement income.
Further, many people use cash value for infinite banking, 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.
However, we should also point out the downside to this choice and this is the higher cost. With no expiry date, the premiums are generally higher which presents a tough decision for many.
Universal Life Insurance
Often, many people talk about the big three and we have the last of these with universal life insurance. Again, this is a permanent policy and has the cash value feature but this one is widely considered to have a flexibility with paying premiums that term and whole life do not have.
Although there are rules in place, the policyholder has a certain level of control when it comes to how much of the premium goes towards the death benefit and how much goes to the cash value.
Universal life insurance is generally cheaper than whole life and you can decide the age at which the death benefit is guaranteed. However, many say that this policy is a little more strict in that a missed payment could forfeit the whole policy which means that all previous payments can be lost.
Universal Life vs. Whole Life Insurance
Universal life offers certain flexible features, such as the ability to pay more or less premiums into the policy for a period of time. Also, certain UL policy types, such as Indexed Universal Life and Variable Universal Life allow for either partial or full participation in the stock market.
Alternatively, whole life insurance offers guarantees that are often missing from universal life.
Some whole life guarantees to be aware of are:
- guaranteed fixed premium
- guaranteed death benefit
- guaranteed cash value
The Big Three
When assessing the majority of the US life insurance market, you will notice that a significant percentage choose to go for one of these three options mentioned above. Yet to come, we will take you through some of your other life insurance types available if your needs exceed what we have seen so far.
However, now is a good time to bring up the fact that you will also see different underwriting within each type of life insurance. If you hear or read the word ‘underwritten’, the term that precedes it could have a huge impact on your policy so you need to know the following.
Simplified, Guaranteed and Fully Underwritten
Simplified Issue Life Insurance
When an insurance policy has this, it means that no medical exam will be necessary but some medical questions will be asked. As the name suggests, it is a simplified version of life insurance because all that is required is answering questions. The company may also conduct a background check but for those who don’t want a blood draw or wish to avoid a urine sample, simplified issue life insurance is a great route to take.
Guaranteed Issue Life Insurance
With a guaranteed issue life insurance policy there is no way to be rejected as long as you fall into the basic age requirements (typically 50-80 years of age). As well as having low coverage options only, many policies will also have a minimum amount of time that the policy has to reach before the policy will pay out a death benefit for natural causes. Therefore, if the insured passes away due to natural causes before this limit is reached, no death benefit will be paid. Although this sounds a little harsh at first, it provides the insurance company with security because they are insuring someone based on no medical exam and no questions asked.
Fully Underwritten Life Insurance
With a fully underwritten policy a medical exam is normally needed to qualify and there will also be some additional questions to answer. With this full underwriting, an accurate price can be calculated because a life expectancy figure can be suggested. Because the insurance company is receiving all possible information, premiums will be lower than compared with simplified issue and guaranteed issue policies.
Now back to some different types of life insurance not mentioned above.
Indexed Universal Life Insurance
Indexed universal life is permanent coverage that has both an insurance and investment component. The insurance component is the death benefit. The investment component is the option to tie the cash account build up to a benchmark, such as the S&P 500 or Nasdaq. IUL policies have a maximum and minimum crediting depending on how the index the IUL policy is tied to performs. The minimum is typically 1% and the maximum is 13%. That means if the market tanks and is down 30%, your policy still is credited with 1%. However, if the market rallies hard and is up 30%, your policy only participates in 13% of the move.
Variable Universal Life Insurance
Variable universal life insurance is another permanent option that features a cash component in addition to a death benefit. Despite this, there is a big difference because these policyholders will get to take part in equities and other investment options. Although this increases the risk somewhat, there is a genuine chance of seeing more money in return. Often, there is a misconception that money is directly invested into the market but sub-accounts, tailored in much the same way as mutual funds, will typically be used.
Survivorship Life Insurance
Also known as second to die life insurance, survivorship life insurance allows more than one person to be covered. With Survivorship life insurance, the death benefit is paid out upon the death of the second insured. This type of life insurance policy tends to the needs of couples and situations where two parties need coverage, such as business partners.
Finally, we have a life insurance type that has been designed for the older consumer and a minimum age limit is normally found with most large insurance companies going for 50 years, although some burial insurance policies are available for ages 45 and up.
With the cost of an average funeral now at $10,000, these burial insurance policies were first formed so that people could save money before passing to cover funeral and any other expenses that may arise after passing. Despite the average holder of this policy being slightly older, the cost is actually affordable and many choose to go down this route when they have been rejected from more traditional options.
Finding the Best Deals
Nowadays, we have a very focused mind when it comes to expenses like life insurance and it tells us to spend as little as possible. As long as you are paying attention to what each company is offering with unique quotes, you will be able to save some money when compared to the average policyholder and this starts with gathering quotes.
In years gone by, the only way that you could receive multiple quotes was if you contacted many different companies individually and asked them to help.
Nowadays, this process is easier than ever and can normally be done on just one site offering life insurance quotes. After filling in all of your important information, you will be shown a list of quotes from the largest names in the industry. Although price does play a huge role in deciding what policy to open, you also need to assess what each policy offers and your needs moving forward.
As long as you keep your needs at the forefront of your thinking, you can’t go too far wrong. For example, the considerations of a thirty-something year old would be vastly different to those of an eighty year old.
While you are young, you will be able to get cheap premiums for a long time to come. However, a thirty-year policy now will see it end in your sixties and, when it comes to renewal time, your age and health will contribute to higher premiums. Therefore, you might decide, after weighing up the pros and cons, that a permanent policy is best because you are guaranteed the same premium until death regardless of what happens.
With the importance of life insurance being well-known today, it is vital that you make the right decisions not only for you but for your family too. If you need help, it might be wise to speak to a professional who will be able to give advice after assessing your situation. This being said, you should now have enough information to give it some more thought so thanks for your time and good luck!