Different types of life insurance policies explained
There are different types of life insurance policy plans. We will cover as many different types of life insurance policies, coverage and products to help making you smarter and more educated insurance shoppers.
The two main types of life insurance are term life insurance vs whole life insurance
(also named permanent life insurance
). These operate exactly like you think they would. Some will claim that they are also the best types of life insurance.
Term life insurance
Term life insurance covers a limited period of time, that can be 10, 20 or 30 years, some life insurance companies even offer coverage for up to 35 and 40 years. It doesn't build cash value but is rather a fixed rate of the stated death benefit. In the unfortunate occasion of the insured person's death during the policy's duration, it pays that benefit to the designated beneficiaries. When the term life insurance expires, it can either be renewed by the policyholders for another term, converted for a permanent policy or terminated.
Permanent life insurance (or Whole life insurance)
Permanent life insurance is a general name for a life insurance policies that never expire. Permanent life insurance policies costs are higher than the costs of term life insurance policies however it provides extra benefits such as cash value, the savings element of permanent life insurance, which can be loaned against the policy by policyholders to use for large expenses, grows and build value over time.
Permanent life insurance is the most familiar permanent life insurance form. Whole life insurance lasts for the entire life of the policyholder. It similarly has a death benefit, but it functions as a tax deferred savings account. Essentially, the death benefit accrues interest at a fixed rate. Every month, some of the money you are paying for the policy goes into the savings account. As a result, the actual value of your policy grows over time. This is the main reason why whole life insurance can be so much more expensive, up to 15 times as much as a term life insurance policy. A whole life plan will exist for whatever duration of time you wish (and pay for). It is important to note, however, that associated taxes and fees make whole life insurance pretty complicated. If you do need or believe you will benefit from the growing cash value, this policy may be a good choice for you.
Different Types of Life Insurance Explained
There are different types of life assurance policies and types of life insurance products other than term and whole life insurance, and within these two broad classes of life insurance policies there are many subcategories to choose from. These include:
- Universal life insurance
- Variable life insurance
- Variable universal life insurance and others
The first we will cover is universal life insurance.
Universal Life Insurance
Similar to a whole life insurance policy, universal life insurance has a cash value. The premiums you pay will go towards both that value as well as the death benefit. The key with universal life insurance is that policyholders can actually alter both the premium and death benefit amount within the same policy.
Essentially, if you are not limited by the cash value, you can actually use it to pay off the monthly premium, making money off of your accrued interest. One thing to note, though, is that the cash value of a universal life insurance policy has a varying interest rate related to the market interest rate.
In terms of the death benefit, it is flexible but may cause increased underwriting and fees. This policy type is beneficial if you have a fluid financial situation. Based on your current and projected needs you can create your own, optimized insurance plan.
Overall, the flexibility of the universal life insurance plan is what is appealing to many who choose to purchase it. However, for others, this concept of fluidity and change is very confusing and unnecessary and thus many choose to take a different path. Remember to think about your specific needs. Create a list or outline of what it is you are looking for when it comes to a life insurance plan. Is flexibility important to you?
Variable Life Insurance
Another type of whole life insurance is variable life insurance. With a whole life insurance policy, the cash value functions as a savings account with a guaranteed minimum interest rate. On the other hand, a variable life insurance cash value is like an investment. The money you pay goes into multiple mutual fund-like accounts that will grow more over time. However, this carries a risk as you can lose money if the market enters recession. The value of your policy lies in the value of the stock market.
Although variable life insurance is a better investment than whole life insurance policies, your investment options are very limited. You only have a select number of mutual funds available at your disposal.
While fees are often lower with a variable life insurance policy than a whole life policy, this type of insurance plan comes with great risk. Managing it requires a deep understanding of investing and enough time to analyze your current plan and make changes. As such, a variable life insurance policy has many limitations.
Simplified Issue Life Insurance
The last type of insurance we will cover in great depth is simplified issue life insurance. This is a type of term life insurance.
When you apply for a life insurance policy, you normally go through a medical exam as part of the underwriting process so the insurer can assess the “value” of your risk. From this exam, your premium rate is determined. If you are looking to avoid this process, a simplified issue life insurance is the one for you. The hallmark of this type of plan is the “no exam policy.” In place of the exam, your risk would instead be determined through a health questionnaire.
This “no exam policy” mainly benefits healthy individuals who are looking to quickly purchase a plan.
Unfortunately, people in poor health may still be subjected to a medical exam and also may be denied an insurance plan.
If you do determine that a simplified issue life insurance policy is the one for you, it is important to consider another factor: the cost. This type of plan tends to be more expensive than others. Under other policies, a medical exam would determine a lower rate for a healthy individual compared to other people, but without this health check, you may be paying more than you otherwise would.
Other Types of Life Insurance
Group life insurance
Group life insurance covers a number of different people under one contract. This is typically found in workplaces.
Mortgage life insurance
While we hope you won't, if you die, a mortgage life insurance plan will cover the remaining balance of your mortgage payments. This may take some of the burden off of your beneficiaries who would otherwise have to pay it off. This plan typically requires no medical exam.
Credit life insurance
Credit life insurance
is similar to the mortgage life insurance but applies to loans
. If you die, this policy will cover the remaining balance of your loan
Accidental death and dismemberment insurance
Accidental death insurance and dismemberment insurance will pay you or your beneficiaries a certain amount of money in the event you die or are dismembered due to an accident.
Joint life insurance
Joint life insurance insures two people, usually spouses, under one policy. There are two distinct types of joint life insurance:
- First-to-die joint life insurance pays out upon the death of the first person. The surviving member is the beneficiary. This type of policy allows the second spouse to continue on with life with the lump sum after the death of their spouse.
- Second-to-die joint life insurance
pays out after both people have died. A policy like this is typically used when heirs need money to pay estate or inheritance taxes
. The money goes to the couple’s beneficiaries. One downside to this is that the surviving spouse must continue to pay the premium once the first spouse has passed
Level term life insurance
This is often found just as term life insurance; however, they are not synonymous. Level term life insurance is a type of term life insurance in which the premium and the death benefit do not change throughout the time period of the plan.
Direct life insurance
This is a life insurance product in which the buyer does not need to deal with an agent and can instead work directly with the insurance company.