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You may be surprised to learn that there is a lot of difference between life insurance policies or term life insurance policies. Learn about the different types of life insurance policies.
11 Different Types of Life Insurance Policies Available Today Include
- Term Life
- Critical Illness
- Supplemental Life
- Universal Life
- Guaranteed Universal Life
- Variable Universal Life
- Tax-Free Death Benefit
- Guaranteed Death Benefit
- Universal Life with Living Benefits
- Guaranteed Revocable
- Variable Life
Some offer little in the way of cash value.
Others carry high premiums.
And still others have high costs.
What they have in common is that they can offer you cash value and death benefits when you need them most. Life insurance can protect your family's economic future by honoring your commitment to provide for them.
Although each of these types of life insurance policies offer something different, all of these policies have the same purpose – to pay benefits to your beneficiaries after you die.
Unlike term life policies, which only pay out if you die before some time specified in the policy, all of these policies will pay out when you die, although there are some stipulations. That's what makes these policies more versatile and valuable than the simple term life insurance policy.
Whether you're looking for supplemental life insurance or a simple death benefit to make sure your family is financially secure after you're gone, this guide on the different types of life insurance policies provides information you need.
Term Life Insurance Policies
Term life insurance policies are the most commonly bought type of life insurance. Term life usually costs less than other policies, but it’s only designed to cover expenses during a specified time period. For example, a person might buy a 20 year term life insurance policy to cover his or her family should he or she die in the next twenty years. If a mother buys a 10 year term policy and then has a child, she may choose to buy a new 20 year term policy to cover the expenses of her entire family.
The biggest drawback to term insurance is that you lose coverage after the term expires, so most people will eventually buy permanent insurance. If you die before the term expires, your policy will pay out a lump sum to your beneficiaries.
Permanent Life Insurance Coverage
When you buy an individual life insurance policy, you are buying coverage for your own life only. This is also called term life insurance. If you pass away, the beneficiaries you’ve designated will receive the payout from your policy.
By contrast, a permanent life insurance policy covers your life for as long as you are alive, regardless of your health. Any payout to your beneficiaries is based on the cash value of the policy earning interest.
Whole Life Insurance Coverage
Whole life insurance policy provides insurance coverage for the duration of your life. It is a permanent protection since it is designed to run to the end of your life-time.
Your policy will accumulate a cash value which can be used to cover current expenses, be left to your beneficiaries, or can be used as collateral for loans.
Example: The whole-life policy can be terminated once all premiums paid are equal to the face amount of the policy.
Universal Life Insurance Coverage
Universal life insurance coverage is great because you can customize it to fit your needs.
To put it simply, with universal life insurance coverage you choose how much money will be put away each day. How much life insurance coverage do you need?
Well, that’s a loaded question! Life insurance coverage is a very personal decision; it depends on how much money your family will need to be taken care of, what debts you have, and what financial goals you want to achieve.
But if you’re looking for something that will help you determine how much coverage you need, try the Life Insurance Needs Calculator from the Alliance of Families and the Life America Companies. It’s a helpful tool that walks you through a few simple questions to help you arrive at a final number for insurance coverage.
One last thought on life insurance coverage: always get more than you actually need. If you’re concerned about the cost or the difficulty of obtaining coverage, you can also start with a lower coverage amount but revisit it periodically to keep it in balance with your life.
Variable Life Insurance Coverage
a.k.a., you can control your own life insurance term length and coverage amount. You do this by investing in this kind of policy, which allows you to invest in mutual funds that you select yourself. Your money can grow in many different ways, from highly conservative to highly aggressive.
Variable Universal Life Insurance Coverage
Life insurance is, of course, one of the biggest investments you'll ever make. So it's only logical that you know exactly what kind of coverage you're getting and whether it's suited to your needs. The first major decision you'll have to make is between term life and whole life. The second is whether you want term life with cash value or automatic universal life policies.
Term life is easy to understand. You buy the policy and make a few more payments and you get the death benefit. End of story. With universal life, you're also investing your premiums as you would in a mutual fund. Instead of a fixed death benefit, you get to choose the death benefit amount.
If you choose an automatic variable universal life policy, you'll receive a death benefit that varies each month like your mutual fund values. If you want a fixed death benefit, you'll have to specifically ask for one, although it won't be portable to other companies if you end up switching.
Survivorship Life Insurance Coverage
Survivorship life insurance coverage works well for people who want a flexible way to pay for funeral expenses or an estate tax.
Final Expense Life Insurance Coverage
Final expense life insurance policies (also referred to as funeral policies) and preneed coverage together constitute the structured settlement industry. The growth in popularity of structured settlements can be attributed to their flexibility and certain tax advantages over annuities.
When comparing final expense life insurance with whole life insurance, the former certainly has its advantages. Policyholders who opt for a preneed final expense policy receive a pre-funded policy whereas the latter requires a guarantee through a separate trust. As a result, preneed final expense policies are more liquid and provide greater flexibility and control over the proceeds. Preneed life insurance policies are generally much cheaper than whole life policies and policyholders who need the insurance for a short period of time are likely to save significantly by opting for a preneed policy.
The value of whole life insurance in the event of policyholder death is usually equal to the amount of premiums paid. The value of a final expense life insurance policy, on the other hand, varies and depends on the information in the application and the age of the insured. Final expense policies are most commonly valued on the basis of the outstanding amount of the policy.
No Exam Life Insurance Coverage
No exam life insurance coverage is coverage that is available for individuals who do not qualify for standard life insurance coverage. This coverage gives you the opportunity to insure your life without having to take a medical exam. While having a medical exam can be a major incentive for many individuals in the decision to apply for life insurance, you may not be aware that you can still insure your life with limited or no health concerns.
If you have medical concerns, you should seek the opinion of your own physician and agent before applying for coverage. The insurance company will have its own set of underwriting guidelines that reflect its underwriting philosophy and risk tolerance. The interpretation of medical conditions and life expectancy varies across insurance companies, so you should always discuss your situation with an agent.
In any case, no exam life insurance coverage is available, primarily because of the number of people who are currently covered. According to the Employee Benefit Research Institute, 61% of employed workers ages 18 to 64 have employer-provided life insurance coverage. This means that there are a lot of people already covered that the insurance companies have to underwrite. While no exam life insurance coverage is available and it is not the best option for everyone, it is still a great choice for many people.
Key Man Life Insurance Coverage
Key man life insurance is a term life insurance policy held by the business’s key employees or individuals referred to as “key persons.” The policy is usually owned by the employer who pays the premiums.
Policies are generally held by a business for its key executives and the purpose is to provide cash to the company in the event that the key man dies or becomes unable to continue to work.
The cash element is financed via a policy loan, where a certain percentage (typically 20%) of the whole amount of the policy is borrowed from an insurance company. This loan is usually paid back in installments as long as the key man is working for the company. If the key man dies or becomes unable to work, the full amount of the loan is repaid to the life insurance company.
If the policy has a cash value, it is usually used as collateral for this loan. For key man life insurance policies that have cash values, it is particularly important to determine if the death benefit is equal to or greater than the loan value, because if it is not, then you are just paying off the loan with your own money. It is also important to purchase a policy where the death benefit is guaranteed to be paid. Without a guarantee, the proceeds of the policy may not cover any unpaid loan balances.
Increasing and Decreasing Term Life Insurance Coverage
Buy Term Life Insurance with the plan to increase or decrease your coverage based upon your needs later.
Two of the biggest annuity questions are, “Can I increase my coverage later?” and “Can I decrease my coverage later?”
You generally cannot increase or decrease a Universal Life or Whole Life policy…the premiums you select at the beginning of that type of policy remain the same throughout the life of the policy.
The exception is whole life with guaranteed premiums, which allow you to increase your coverage level or decrease your coverage level.
When you purchase term life insurance, then you have the option of later increasing or decreasing your coverage, merely by paying the premium changes that are required for your chosen option.
For example, if you buy a 20-year, increasing term life insurance policy, then you would be able to increase your coverage level after 10 years, but you would not have the option of decreasing your coverage at any point in the future (something that is commonly available with a Universal or Whole Life policy).
At the end of the 20-year, whether the total of your premium payments has been great or small, you will maintain the same 20-year policy amount.
Understanding the “Cash Value”
One of the great things about life insurance is that it provides your family with a safety net for any situation … whether the need is emotional or financial in nature.
However, before you make the decision to purchase a life insurance policy, it’s important to fully understand the specific type of policy that you’re purchasing.
That’s because each type of policy offers different features that may or may not be right for your situation.
If you’re trying to compare one life insurance policy to another, you’ll need to understand the features and the terminology that each offers. “Cash value” is just one of these features.
From Wikipedia:
“Cash value is the hypothetical amount of money that a policy would fetch on the open market. In other words, cash value is the value of the policyholder's interest in the policy less the value of any unpaid premiums.”
Having cash value is a key feature of most life insurance policies. In fact, cash value is often one of the main reasons why people purchase these policies in the first place. “Cash value” is usually expressed as a dollar amount.
A Closer Look at the Tax Benefits of Life Insurance
Almost everyone needs life insurance, but most people are confused by the seemingly endless number of choices. There are term, whole, universal, variable, and variable final expense insurance policies.
The first thing to know is that not all life insurance polices are created equal, so before you buy a policy, it is critically important to understand the differences and the respective pros and cons of each type.
Here we’ve outlined the basic characteristics of four different types of policies and explained why one may be better (or equally good) than another in a particular situation.
You might also want to read our recent article detailing the 10 things a good life insurance policy should have.
How to Get the Best Premium on All Types of Life Insurance Coverage
It is not uncommon for life insurance prices to vary from company to company by over 200%. Some companies charge a small amount, while others can charge too high. Price is clearly one factor that you should consider when purchasing a life insurance plan, but it isn’t the only factor. It is not uncommon for people to buy a policy and then call us after they have paid for coverage for several years. They didn’t shop around and are now paying way too much for the coverage they have.
The reason for such differences is largely because different types of life insurance policies have different variables and features. For example, a term life insurance policy is expected to last for 20 years, while a permanent life insurance is meant to last for your entire life. The price and type of life insurance policy you get will depend on how long you need the policy to last. For example, a permanent life insurance policy will have a higher premium than a term life insurance policy because you just can’t get this type of policy. In addition to the policy term, other variables that affect the life insurance price include your age, health, the type of beneficiary, and the company providing the coverage.
About the Author
The author has written this article to help you choose the right life insurance policy for you. This article discusses the different variations of life insurance policies and the meaning of coverage and benefits. It gives you an idea of how much coverage is enough to meet your family’s needs in the event of your death. It will also take a look at some important considerations in life insurance like alternatives to life insurance and required medical examinations.
Life insurance helps loved ones be financially secure by providing them with a lump sum of money should you unexpectedly die. The money is payable to your family members, spouse or partner, in the event of your death. Life insurance is usually the most important part of funeral planning. Adequately insured, you can be sure your family will not be saddled with thousands of dollars of debt if you become another statistic.
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