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.
What is 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?
What is 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.
What is 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.
Underwriting and What it Means for Your Life Insurance Policy
Often when looking for any insurance policy the term underwriting
appears quite frequently. In the terms of a life insurance policy, underwriting refers to the life insurance company’s determination of your risk (meaning how risky of a policyholder are you). Your life insurance risk is directly correlated to your health, gender, age, profession, and other relevant factors. An insurance company must protect itself from policyholders who are predisposed to frequent hospital visits, injuries, and have a higher risk of death. This makes sense from an economic standpoint. Insurance companies make money when you do NOT need their help. Essentially you are paying them a premium for nothing. However, as soon as something does happen, the best insurance companies are incredibly useful in providing you the funds and help you need. Insuranks become helpful here by making it easier for you to find the best insurance companies, unbiased and transparently, based on the experience of other insurance customers, just like you.
In other classifications of insurance
, your rates can change, and companies will frequently re-evaluate and re-underwrite. For example, if you have car insurance
and are involved in multiple auto accidents throughout the year, your insurance will certainly go up as you are, in their eyes, a riskier driver than they initially thought. Makes sense, right? Most life insurance policies won’t change prices for the duration of your term, so underwriting is incredibly important for life insurance companies. For term policies, they are making the bet that you won’t die during the duration of the term. If you are high risk or older, expect your premium to go up depending on the length of the term. For whole life insurance, the same is true, but you pay a substantial amount more per month because your policy only expires if you die, meaning the insurance company is required to pay at some point.
From an underwriting perspective there are two ends of the spectrum, low risk and high risk
. There are unique plans for both categories. If you are low risk, you can qualify for a fully underwritten life insurance plan. This means that the insurance company has vetted you entirely and believes you are in the lowest risk bracket of the population. As a result, you will pay a relatively low premium each month.
On the other hand, some insurance companies will offer guaranteed issue life insurance for those who are in the highest risk category. For guaranteed issue life insurance, it's a no questions asked policy, and they can’t turn you down, but expect to pay incredibly high monthly premiums for low coverage. People often choose this policy when they are turned down elsewhere and want to be able to cover funeral costs.