Five of the Most Popular Types of Life Insurance
There are several main categories of life insurance, including term, whole, universal, variable, and final expense. Here we’ll go through the many types of life insurance and help you pick the one that’s right for you.
There are five basic kinds of life insurance policies to consider when shopping around: term life, whole life, universal life, variable life, and burial or final expenditure life insurance.
There are many options when it comes to life insurance, but they can all be broken down into two broad classifications: term life and permanent life. Term life insurance, which covers you for a certain number of years, is far and away the most popular option, while permanent insurance covers you for the rest of your life.
Your budget, personal situation, specialized requirements, and desired level of coverage will all play a role in determining the appropriate insurance policy for you. How they work, what advantages and disadvantages they present, how long they last, and who they are best suited for are all discussed in this article for the most common types of life insurance policies available today.
Term life insurance coverage
Because of its low upfront cost, relative ease of use, and temporary nature, term life insurance has become the standard in the insurance industry. One of the easiest and most cost-effective ways to protect your loved ones financially is with term life insurance.
What happens is that term life insurance only lasts for a predetermined amount of time before it lapses. When you’ve paid your premiums for the policy’s duration, your beneficiaries will receive a predetermined sum of money (the death benefit) from the insurance provider. The beneficiary of a life insurance policy can choose between receiving a lump payment or an annuity for the death benefit. Most people choose to get their death benefits as a lump payment instead of in installments so that they can save money on taxes.
Term plans are less costly than other forms of life insurance and often have lower premium expenses.
Length: There is a deadline at the end of the term, which could coincide with the payoff of a mortgage or the completion of high school for your children. Permanent life insurance is the best option if you’re looking for lifetime protection.
Best for: Consumers who regularly buy life insurance. Term life insurance could be a good option for those seeking more affordable coverage for a longer period of time (30 years or more).
Total life insurance
Whole life insurance is the most common form of permanent life insurance due to its low cost and indefinite duration. Its cash value earns a fixed rate of interest and functions like an investment-like, tax-deferred savings account.
How it works: The death benefit on a whole life insurance policy is set and the cash value grows with interest. In insurance, your premium is split between the expense of maintaining the coverage and the cash value account.
Pro: Lifetime protection with a financial value that can be used for endowments or other legacy planning purposes. And because it’s long-term care, this insurance could be crucial in supporting long-term dependents like disabled children.
Whole life insurance policies can be anywhere from five to fifteen times as expensive and complicated as term life insurance policies, for the same amount of death benefit. The cash value component of whole life insurance makes it more complicated than term life insurance due to costs, taxes, interest, and other obligations.
Best for: Those with significant wealth who are looking to spread their investments around and people with family members who may require long-term care.
Life insurance that is universal
Premiums for universal life insurance, a form of perpetual insurance, can be adjusted over the policy’s lifetime. If you pay less each month for your insurance, that money will come out of your cash worth.
If you can afford it and desire some flexibility in your life insurance coverage, a universal life insurance policy may be the best option for you. The cost and complexity of a universal policy far exceed those of a traditional whole life plan.
How it works: With universal life insurance, you may tailor both your premiums and your death benefit to meet your needs. You can use the cash value to pay your premiums if you decide to cancel or modify your coverage at any point.
Flexibility: You may change your rates according to your financial situation.
Because the cash value’s return is tied to the stock market, it’s not the best option for long-term financial planning.
Best for: High-income earners looking to save money without joining a higher-income group.
variable life insurance policy
Permanent coverage in the form of variable life insurance allows you to invest your cash value in various mutual funds and other assets held by the insurance company.
Despite the fact that the death benefit on variable life insurance is guaranteed, the cash value is not. If the fund underperforms, you take on the investment risk but have the potential for higher returns than with a whole life insurance policy, which offers a fixed interest rate.
How it works: You can put the cash value of your variable life insurance policy into a number of different investment options, some of which may be mutual funds. How well investments do will reflect shifts in the market as a whole.
Pro: Possible gain: interest rates on variable plans may be higher than those on standard whole life policies.
Investment risk: the possibility of losing money if the funds you choose underperform.
Best for: High-earners searching for long-term insurance coverage to diversify their financial portfolio.
If you need help deciding between term and whole life insurance, talk to a financial advisor and an independent broker to get the right coverage for your needs. Policygenius’s experts, who hold licenses in every state, can guide you through every step of the life insurance buying process and give you unbiased, transparent guidance.
Last-minute expense insurance
Burial insurance, also known as final expense insurance, is a type of life insurance that provides a small death benefit to your loved ones to assist pay for funeral and other final expenses. Burial insurance is commonly purchased by the elderly who need only a modest amount of coverage to pay for final expenses, in contrast to regular life insurance which is meant to replace decades of income.
Due to higher premiums and lower coverage amounts, last expense insurance is not always more cost-effective than term life insurance.
How it works: You only need to answer a few questions to get last-minute insurance, in contrast to the extensive medical history and exam required by most traditional policies. Also, the time it takes to get insured is negligible at best.
Pro: The guaranteed benefit makes it easy to get a small sum to meet last expenses including funeral costs, hospital bills, and caskets or urns.
Cost: high rates for lesser coverage quantities.
Best for: Those who have trouble getting normal health insurance, such as the elderly and those with ongoing medical conditions.
What are the fundamental characteristics of a life insurance policy?
Premium: It’s the money you fork over to the insurance company every month. Monthly or annual payments are typical for premiums.
Policy duration: Meaningful Quantity of Time Covered by the Policy. Term insurance contracts typically cover a period of 10-30 years. The coverage provided by permanent plans is permanent, meaning it lasts for the rest of your life.
When an insured person passes away, his or her heirs are entitled to receive the death benefit. Typically, beneficiaries get death benefits as tax-free lump sum payments.
Beneficiary: When an insured person dies, the beneficiary or beneficiaries get the death benefit.
Many permanent life insurance policies have a cash value component, which is an interest-bearing savings account within the policy.
Simply said, riders are supplemental coverage options that can be added to your policy at no extra cost. While some policies already have riders, others need you to buy them on top of the main policy.
What is the best sort of life insurance for you?
Customers who are looking for temporary, low-cost life insurance might consider term life plans. Customers who can afford a more expensive policy and desire permanent protection are good candidates for whole, universal, and variable life insurance.
Customers who are too elderly to qualify for traditional life insurance or who do not want to put an undue financial strain on their loved ones may wish to consider last expense insurance.
Consult a skilled independent broker, such as Policygenius, or a financial counselor when trying to choose which insurance company and policy will serve your needs best. They can help you evaluate numerous insurance plans and pick the one that best meets your needs.
Ten other forms of life insurance
Life insurance with no medical exam
No medical exam policies are those that do not mandate a checkup before coverage can begin. Instead, no-med insurance uses data from your medical history and other factors to determine your premiums.
The delay between starting the enrollment process and when coverage actually kicks in is also shorter with these plans. You may be eligible for no-med if you have no significant health problems and no history of hereditary diseases like heart disease.
Pro: Saves time; no-med allows you to get life insurance without having to complete a medical exam.
Con: People who are elderly or in bad health may be ineligible.
Suitable for: Anyone in excellent health
Life insurance for the short term
As you wait for a permanent life insurance policy to take effect, you could obtain temporary coverage through a short-term policy. Short-term policies provide protection if you are unable to get affordable rates due to an existing health condition or while your insurance company is evaluating your application.
While short-term insurance may offer some temporary protection, it is subject to its own limitations, such as increasing costs and coverage limits. Most people either get a permanent life insurance policy or a temporary life insurance policy that may be renewed annually.
Convenience: interim coverage may be provided in the short term.
Duration and expense: may only last a few months and/or have escalating premiums.
People who are awaiting approval for longer-term insurance coverage.
Whole life insurance with a simplified problem
Simple whole life insurance, also known as simplified issue life insurance, is a form of permanent life insurance that does not require a medical exam and is therefore accessible to persons who would otherwise be unable to obtain life insurance. You’ll have to answer some questions about your health instead.
The shorter application process means almost instant coverage, but the higher premiums and lower levels of coverage are the result of a less thorough medical evaluation by the insurer. On the other hand, simplified issue plans may make it easier for the elderly or people with certain pre-existing diseases to receive coverage in order to cover last expenses.
Convenience: the simplified issue offers minor coverage for final costs without requiring a medical checkup.
Cost: higher rates for less coverage. People who are beyond a particular age or have serious underlying medical issues may not be eligible.
Best for: Seniors who do not have serious medical difficulties.
Life insurance with a guaranteed issue
Burial insurance policies include guaranteed-issue life policies. Those aged 45 to 80, as well as those who cannot qualify for a typical life insurance policy due to a serious medical condition or terminal disease, are good candidates for permanent coverage. Approval of your application is quite likely.
Guaranteed-issue life insurance applications do not involve health questionnaires or a medical exam, unlike term and whole life insurance. Upon your passing, your loved ones will get a little death benefit to help pay for final expenditures.
Pro: Guaranteed issuance means even a little death benefit can be used to cover unexpected costs.
Cost: high costs for inadequate protection.
Best for: Those of advanced age or those with fatal illnesses
Mortgage defense insurance
MPI, or mortgage protection insurance, is designed to settle your outstanding mortgage debt in the event of your death. MPI is a far more limited option than traditional life insurance because the death benefit is paid directly to your mortgage lender.
Similar to a decreasing term life insurance policy, the death benefit on an MPI decreases over time as you make mortgage payments, instead of going to your loved ones as it would with a traditional life insurance policy. The purchase of standard term life insurance is recommended in the vast majority of cases.
Pro: Access: An MPI policy may provide coverage for individuals who are unable to obtain traditional term life insurance due to age or health issues.
The coverage is limited; it only covers mortgage payments.
Best for: Anyone who has a mortgage and is not eligible for regular life insurance.
Life insurance for groups
Group life insurance, sometimes called group term life insurance, is a single policy that provides protection for a large number of people. Employers are a common source, but labor groups and unions may also be good options.
The rates for group term life insurance are typically low, if not free, because the insured party (such as your company) subsidizes the coverage. Your coverage will not exceed a set amount, usually between $50,000 and $100,000, which is one and a half to two times your annual salary.
Although group life insurance is inexpensive and convenient to obtain, the level of coverage provided is often insufficient, and policy termination is virtually inevitable if you leave your current employer. Supplement your group coverage with a term life insurance policy to ensure your loved ones are protected.
Convenience: group insurance gives workers assured coverage at little or no expense.
Con: Limited coverage, and coverage generally ends when you quit your job.
Best for: Anyone whose work provides group life insurance.
Insurance against accidental death and dismemberment
You and your loved ones are protected in the event of your untimely demise or the loss of a limb due to an accident with accidental death and dismemberment insurance (AD&D). Although it is quite inexpensive if acquired individually, many workplaces now provide it as an alternative to life insurance.
AD&D is not a suitable replacement for life insurance due to the narrow situations under which it pays out. Accidental death and dismemberment insurance (AD&D) only provides benefits if you are injured or killed in an accident, while life insurance covers most other types of deaths.
Pro: Premiums are typically inexpensive, whether offered free of charge by your employer or purchased independently.
Limited coverage: While accidental death and dismemberment insurance (AD&D) can help, a traditional life insurance policy will provide you more peace of mind.
Best for: While accidental death and dismemberment insurance (AD&D) can help, a traditional life insurance policy will provide you more peace of mind.
Additional life insurance
Voluntary or supplemental life insurance (also known as additional life insurance) is an option for those who want to complement their existing employer-provided life insurance policy. That is to say, it can be added to a group life insurance policy if the latter does not provide enough financial protection on its own.
Companies may offer supplemental life insurance to their employees as an additional perk on top of the standard group life insurance policy. You can get a supplementary plan through your employer, but you can also get one on your own.
Advantage: Convenience—aassured access to extra coverage when given as a workplace benefit.
Con: Limited coverage; you’ll likely need to get supplemental term insurance to obtain all of the coverage you want.
Best for: Anyone searching for quick access to employer-provided healthcare.
Life insurance on credit
If you die before paying off your debt, your credit life insurance coverage will pay the lender instead of your beneficiaries. A mortgage or a line of credit for a business both have insurance policies attached to them. Your creditor will be the sole recipient of the policy’s death benefit, which will be used to settle the debt in question.
You’ll be accepted no matter what, and your life insurance’s payout will decrease as your debt is paid off. Your lender will receive the death benefit from your insurer if you pass away while the policy is active. Mortgage protection insurance is a popular form of credit life insurance (MPI).
Pro: Convenience: if you are not qualified for regular life insurance, credit life insurance may be an alternative to paying a debt.
Coverage restrictions: Your lender is the beneficiary, and the death benefit only applies to a single loan.
Best for: Anyone who has debt and is not qualified for regular life insurance.
Life insurance for a couple
A combined life insurance policy is one that covers the lives of more than one person. Even while business partners might be joint policyholders, most joint policyholders are married or live together.
The vast majority of life insurance plans purchased in a couple’s name are permanent life insurance policies that provide lifetime protection plus a cash value component that may be invested to generate money. Joint term life insurance plans that terminate after a set period of time do exist, albeit they are unusual.
Convenience: If one partner does not meet the requirements for coverage or if two individual policies would be too costly, a combined plan may be an option.
A combination plan may cost more than two individual policies, and beneficiaries of some types of joint insurance may have to wait longer to get the death benefit.
Best for: Couples who do not meet the requirements for two individual life insurance policies.
Joint life insurance plans are classified into two types:
First-to-die: The insurance payout occurs upon the passing of the first of the two spouses. First-to-die is most like an individual life insurance policy. It helps the policyholder’s surviving spouse or dependents pay bills after the death of the breadwinner.
The coverage pays money in the event of the death of both policyholders. Survivorship insurance, or second-to-die life insurance, is meant to provide a financial windfall to a beneficiary in the event of the insured’s death. It does nothing to replace your partner’s salary.
