When it comes to life insurance, most types can fit into one of two categories: term life insurance or permanent life insurance. Term life insurance lasts for a specific period of time. Permanent life insurance is structured to last your entire life.
Table of Contents
Types of Term Life Insurance
Types of Permanent Life Insurance
Other Types of Life Insurance
Do you need life insurance? There are many life insurance products to choose from. The majority of life insurance products can be categorized into either a type of term life insurance, which is temporary coverage, or permanent life insurance, which can provide lifelong coverage.
Most individuals who need life insurance to protect their families from financial struggle just need term life insurance. However, all life insurance products have their place. This article will help explain some of the most common life insurance products.
Types of Term Life Insurance
Level Term Life Insurance
Term life insurance is simply a type of life insurance that lasts for a specific period of time called a term. If you die within that specific period of time, the life insurance carrier pays a death benefit to your beneficiaries. Term life insurance is the least expensive way to purchase life insurance coverage.
» Compare: Level term life insurance quotes
Level term life insurance is the life insurance product Quotacy sells most often. With level term life insurance, your premiums remain the same the entire duration of your term length. They will never increase or decrease. So, if you’re paying $25 per month for your 30-year $500,000 level term policy, you will only pay $25 per month each of those 30 years. If you die before the 30 years is over, the premiums payments are no longer required and your beneficiaries receive $500,000.
Decreasing Term Life Insurance
Decreasing term life insurance is less expensive than level term life insurance, but the death benefit decreases over time. Decreasing term life insurance is often referred to as mortgage term life insurance since it’s designed to decrease protection as your financial obligations (i.e. a mortgage) also decrease.
We recommend level term life insurance over decreasing term life insurance. If you think your coverage needs will lower over time, the laddering strategy is a better option.
» Learn more: Ladder Life Insurance to Save Money
Annual Renewable Term Life Insurance
Annual renewable term life insurance (ART) is a type of term life insurance policy that allows you to purchase one year of coverage at a time. At the very beginning of setting up an annual renewable term life insurance policy, you will lock in a period of insurability. This means that you can lock in anywhere between five and 30 years, for which you can renew annually with no proof of insurability, i.e. no exam or medical questions. However, during this time frame, your premiums will be assessed each year and will increase as you get older, unlike level term life insurance. Unlike decreasing term life insurance, the death benefit of ART policies does remain the same.
ART premiums start out lower than that of level term life insurance, but because they increase significantly, we typically do not recommend ART. Purchasing a level term life insurance policy is often your best option.
Return of Premium Term Life Insurance
Return of premium term life insurance is the only type of term life insurance in which you get a refund of your paid premiums if you do not die during the term. As with a traditional term life insurance policy, the premiums you pay are guaranteed to stay level for the entire term of your policy. However, the premiums for a return of premium (ROP) term policy compared to a regular term policy are much higher.
Traditional term life insurance is the best option for most families because of how affordable it is; however, if you can afford to regularly pay the increased ROP premiums without fail, then it’s something to be considered.
» Learn more: What Is Return of Premium Life Insurance?
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Types of Permanent Life Insurance
Whole Life Insurance
Whole life insurance is designed to last your entire life, often has fixed premiums, and accumulates a cash value over time. In general, whole life insurance is the most comprehensive and fully featured type of permanent coverage. This means that it typically has the highest premiums as well. A whole life policy has the following features:
- Dividend Paying
- Guaranteed for Life
- Policy Loan Options
Term life insurance is often the best type of life insurance for families, but whole life can be beneficial for individuals with a higher income and have maxed out retirement plans.
Universal Life Insurance
Universal Life (UL) insurance is another common type of permanent life insurance. It trades some of the value growth benefits of a whole life insurance policy in exchange for more flexible payment plans and a lower price.
Basically, a universal life insurance policy is a plan that offers the same death benefit as a whole life plan, but with a very flexible payment structure. The policy is paid for and kept active by drawing on the cash value for its premium payments, not directly by regular premium payments.
However, while a whole life policy offers dividends that can grow above and beyond a normal interest rate, a universal life policy will only pay a set amount of interest each year. This means that between a UL policy and a whole life policy purchased at the same time, the whole life policy will often grow faster and offer a greater death benefit.
Additionally, the price for a standard UL policy can increase as you age if the illustrated interest rates drop or the internal cost of insurance increases.
Guaranteed Universal Life Insurance
A Guaranteed Universal Life (GUL) policy is arguably the simplest type of permanent life insurance. When you buy a GUL plan, you get a policy with a set face amount and regular payment. As long as you continue to pay the premium on time, your rate and death benefit are locked in and guaranteed to stay the same.
Compared to term life insurance, GUL policies have a higher premium because they cover a longer period of time. However, compared to other permanent life plans, GUL policies are often relatively inexpensive. GUL policies also typically have little or no cash value within the policy.
Indexed Universal Life Insurance
An Indexed Universal Life (IUL) insurance policy functions similarly to a standard universal life policy, except that it accumulates value through investments in a stock market index rather than the typical low-risk investments that most dividend-paying policies use to grow.
The benefit of using an IUL policy as opposed to simply investing in an index yourself is that there is a guaranteed 0% floor for your investment risk. If the stock market doesn’t perform well, your policy won’t lose value, it just won’t grow. The downside is that if you purchase your IUL in a strong market, the policy actually caps the amount of money it can accumulate—typically at around 10%-15%.
However, like anything tied to the stock market, its growth isn’t something you can count on 100%. Because the price isn’t guaranteed, there is the possibility that a long streak of poor market activity could raise your premium and make your policy become unaffordable.
Guaranteed Whole Life Insurance
Guaranteed whole life insurance is a type of life insurance offered to older individuals (typically age 50+) that you cannot be denied coverage on, hence guaranteed. To obtain guaranteed whole life insurance you do not need to take a medical exam nor are your medical records taken into consideration. Coverage is put inforce as soon as you make your first payment.
Because this type of life insurance is so easy to be approved on, the premiums are much more expensive when compared to fully underwritten life insurance. The death benefit options are also often lower.
Guaranteed whole life insurance is also often called final expense life insurance, funeral insurance, burial insurance, and guaranteed acceptance life insurance.
Many individuals buy guaranteed life insurance as a last resort to leave just enough money behind to loved ones in order to take care of medical expenses and funeral costs. It’s important to note that these policies often have payout limitations in the first two years.
Here is an example of one insurance company’s two-year limitations:
- With a guaranteed whole life insurance policy, if you die because of an accident (e.g. a car crash) within the first two years, the full death benefit will be paid to your beneficiaries.
- If you die, but not because of an accident (e.g. cancer), within the first two years, the death benefit will not be paid out, however, all your paid premiums plus a little interest will be paid to your beneficiaries.
- If you die by any means after the first two years, the full death benefit amount will be paid to your beneficiaries.
Other Types of Life Insurance
Simplified Issue Life Insurance
Simplified issue life insurance is essentially just life insurance that you can get without taking a medical exam. You do, however, need to answer a few medical and lifestyle questions in order to be approved.
If they deem it necessary, the life insurance company may request your medical records. The life insurance company will also take a look at your driving record and run your name through a pharmaceutical database to evaluate any prescription medications you may be taking (or have taken).
In general, if you’re relatively healthy and wouldn’t mind a simple medical exam, traditional life insurance is the better option because it will likely be less expensive than a simplified issue life insurance policy. If you need a large amount of coverage, simplified issue life insurance isn’t ideal for you because most life insurance companies cap the death benefit at $100,000 (some companies offer as high as $500,000.) Simplified issue policies are also only generally sold in group purchases.
Accidental Life Insurance
Traditional life insurance policies pay your beneficiaries a death benefit, no matter the means in which you die. However, some life insurance companies have recently begun offering “beginner” life insurance policies that are inexpensive, but only pay a death benefit if you die because of an accident. These policies are Accidental Death and Dismemberment (AD&D) life insurance policies.
One advantage that AD&D has over traditional life insurance, however, is the fact that you could receive the policy’s payout in the event of an accident-related dismemberment or disabilities. For example, if you are in a car crash and lose your sight in one eye due to a head injury, an AD&D policy would pay out a portion of your policy’s face amount to help you pay for medical expenses or simply to help you get back on your feet.
However, some life insurance companies offer optional riders that add AD&D coverage onto a traditional term life policy. This means that if you die due to an accident while covered under a life insurance policy with an AD&D rider, your beneficiaries could receive up to twice your face amount—one payout equal to your face amount from the life insurance half of the policy, and another payout from the AD&D rider.
Overall, we recommend buying a traditional life insurance policy over an AD&D policy to ensure your loved ones are financially protected no matter how you die.
» Learn more: Term Life Insurance vs Whole Life Insurance
Whether you’re interested in term life insurance or permanent life insurance, Quotacy can help.