There are many different life insurance companies in the U.S. but each company offers similar types of life insurance.
At the most basic level, life insurance can be broken down into two major categories: term life insurance and permanent life insurance.
We will go into the various aspects of the different life insurance options available. You can also jump to a specific section by clicking on one of the categories below.
- Term Life Insurance
- Whole Life Insurance
- Universal Life Insurance
- Indexed Universal Life
- Variable Universal Life
- Burial Insurance
- Simplified Issue
- Guaranteed Issue
- Fully Underwritten
Life Insurance Policy Types
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.
Term life insurance 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.
With no cash value building up, the term life insurance rates are affordable and the contract will last for a set amount of time, i.e. the “term.”
Normally, this will be between ten and thirty years with intervals in between.
Various terms available include:
- Annual renewable term
- 5 Year
- 10 Year
- 15 Year
- 20 Year
- 25 Year
- 30 Year
- 35 Year
- 40 Year
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.
What Happens When the Term Policy Ends?
With level term life insurance, the policy premiums are fixed for the term.
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.
Most term policies are convertible. A conversion option in your policy allows you to convert all or a portion of the death benefit to permanent insurance.
The main advantage of a conversion option is if you are diagnosed with a medical condition that would preclude you from getting life insurance, you can always convert the term policy to a permanent policy and keep coverage the rest of your life.
Decreasing term life
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.
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).
Whole life insurance lasts your entire life. The policy builds cash value, which can be accessed through withdrawals or borrowed against via a life insurance loan.
Some whole life offers annual dividends, which act as a return of premium. Whole life policies that offer dividends are called participating life insurance.
Among the different options available, life insurance dividends can be used as cash, reinvested into the policy via paid up additions, and to pay premiums.
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 associated with whole life vs term life. With no expiry date, the premiums are generally higher which presents a tough decision for many.
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 means your premium stays the same over the life of the policy.
Guaranteed death benefit means that your death benefit is guaranteed as long as premiums are paid. Also, your death benefit can increase if you choose to purchase additional life insurance with your dividend.
Guaranteed cash value means the whole life policy will guarantee a certain percentage growth on your cash value every year, typically 3-4% for newer policies.
Universal Life 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.
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.
Indexed universal life is permanent coverage that has both an insurance and cash value component.
The insurance component is the death benefit payout to your beneficiary when you die.
The cash value component can be invested into an indexed account that tracks the progress of an index, 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 0-1% and the maximum is 10-13%.
A guarantee floor means if the market tanks and is down 30%, your policy still is credited with 1%.
Alternatively, a cap means that if the market rallies hard and is up 30%, your policy only participates in the maximum cap % of the move.
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. Instead, sub-accounts, tailored in much the same way as mutual funds, will typically be used.
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.
For a husband and wife, second to die life insurance provides a legacy death benefit payout to heirs.
For business partners, survivorship life insurance provides liquidity to future business owners.
Burial insurance, aka final expense insurance or funeral insurance, is a life insurance type that has been designed for the older consumer and has a minimum age limit.
Typically, final expense insurance companies require an applicant for final expense insurance to be 50 years old at a minimum, 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 are designed so that you can pass on some money to cover final expenses and burial to your loved ones.
The burial insurance policy is basically a small whole life insurance policy. It builds cash value, has fixed premiums, and a fixed death benefit.
Simplified, Guaranteed and Fully Underwritten
When an insurance policy is considered simplified issue, 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.
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.
With a fully underwritten policy a life insurance 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 for fully underwritten policies compared to simplified issue and guaranteed issue policies.