Jason Fisher If you’re new to life insurance, or you’re just deciding which type of life insurance is right for you, you’re in the right place.
In a nutshell, you really only have two options:
- Term – this kind of life insurance expires after a set amount of time (called the “term”) which is usually 10 to 20 years
- Permanent – this type is, as you guessed, the kind which can last a lifetime
Every other type falls into these two categories, except for an accidental death and dismemberment policy, which is exclusionary (it can only pay if you die in an accident).
The Types of Life Insurance Available Are:
- Term
- Whole
- Universal
- Indexed
- Variable
- Simplified Issue
- Guaranteed Issue
- Group Plans
- Accidental*
There are additional sub-types for some of these, too, though they aren’t as widely purchased.
Term Life vs. Whole Life
The most common question you should ask yourself when buying a life insurance policy is how long you need it for.
This is because:
- Term life insurance only lasts as long as you need it, or until it expires
- Whole life insurance is built to keep until the day you die
But – because term expires, it is significantly cheaper!
For this reason, term life insurance is the most common type of life insurance, bar none.
Understanding your need and matching the policy type to your need is the most effective way of choosing, and it might end up saving you a lot of money in the long run.
The most common needs, which tend to be temporary obligations, are:
- Income replacement
- Housing costs
- College tuition
- Debt
Each of these are temporary obligations, even though they may span several years.
Term life insurance can cover you for up to 30 years so it’s probably the best (and cheapest) option for you most of the time.
Why Is Term Life Insurance So Popular?
Namely, price.
However, it’s also much easier to understand.
At it’s core, there are only two elements:
- Death Benefit
- Premium
The death benefit is how much the insurance company will pay your beneficiary when you die.
The premium is how much you pay each month.
Simple.
You pay the company your regular payment on-time and the insurance company guarantees to pay the claim when they receive it.
What’s Wrong With Whole Life?
Nothing is wrong with whole life – a few people still purchase it.
But here are the most common reasons people don’t like it:
- It’s expensive
- It’s harder to understand
- It doesn’t fit most needs
The cost, per thousand, is significantly higher than term because the insurance company knows they will pay – someday.
Whole life insurance is also more complicated. Instead of just a premium payment and death benefit, there is a cash value component.
This cash value component accrues interest, and potentially dividends, and can even be accessible.
Lastly, because of the cost and the permanence of these policies, most consumers don’t find it meets their needs alongside their budget.
If you’re still on the fence, check out our information on term vs. whole life insurance.
Universal Life Insurance
What do you do if you need something more permanent than term life, but don’t have the budget for whole life insurance?
A universal life insurance plan can be a happy middle ground.
Perhaps the most flexible and customizable type of life insurance, a universal life insurance policy is sort of a hybrid between term and whole.
The primary benefits to universal life are its:
- Long duration of coverage (up to a lifetime)
- Lower costs than whole life
- Flexible payment and death benefit options
- Ability to grow cash more aggressively
Universal life insurance policies can be customized to provide coverage to virtually any age. They can be built to last up to age 80, age 90, or even a lifetime.
Somewhat like whole life, there’s a cash component, too.
However, it can be used to:
- Offset premium payments later in life
- Temporarily stop premiums altogether
- Invest into indices or mutual funds
- Access through loans
Its ability to modify your premium payments, or even adjust the death benefit (if the policy allows it) make it way more user friendly.
NOTE: Universal life insurance is a great solution for corporate owned life insurance and bank owned life insurance because of this great set of features and flexibility.
You should note, however, that there are less guarantees with a universal life insurance plan when compared to whole life.
In a whole life contract, you’re guaranteed a minimum death benefit, minimum interest rate, and very little risk.
With the universal life insurance policy, these may not be guaranteed, and if you fall short on cash, your policy could collapse.
If that weren’t enough, those of you who have an investment mindset can look into indexed and variable universal life insurance policies which allow cash to move with mutual funds and market indices.
Indexed Universal Life Insurance
One of the newer types of life insurance available today, relatively speaking, is called indexed universal life, or IUL, for short.
It is one of the more complicated types of life insurance policies, and should only be purchased if you completely understand the policy.
Indexed universal life is like a universal life insurance policy in regards to its death benefit and cash growth, but grants additional flexibility for the owner with the cash portion.
Cash value within the policy can fall into two different accounts:
- Stock Market Index
- Fixed Interest Account
Typically, the stock market index, or equity index, offered is a well represented index, like the S&P 500 or similar. Gains, when left in the account, are tax-deferred, similar to an IRA or 401(k).
However, there are upper limits to returns, so the policy may not gain as much as the index does. The trade-off is a floor, where you’re guaranteed a minimum interest or growth rate, which should help if returns are negative throughout the year.
While it might sound like you get all the upside benefits with little risk, be wary of high premium costs later in life which might eat away at the cash value you’ve gained.
A whole life insurance policy is safer, but an IUL may allow additional growth over time which out paces the general interest account of whole life.
Here’s how IUL’s stack up against whole life insurance.
Variable Life Insurance
While indexed life insurance is sometimes marketed as a supplemental retirement tool because of the investment style it contains, variable life insurance policies are even closer, in reality.
They resemble the stock market more closely because of their unlimited upside based on fund performance, however there’s not a limit to the losses, either.
A variable policy operates nearest to a retirement account, where the cash can be invested directly into different investment accounts and mutual funds, so long as they are available through the insurance company from which you purchase the policy.
For a savvy investor who lacks a life insurance policy, this might sound great.
Others, however, think utilizing a term policy and investing their money into a Roth IRA is a better option.
NOTE: Because indexed and variable life insurance products just that, life insurance, they must be funded with after-tax dollars, and therefore are not directly comparable to traditional IRA’s or 401(k)’s where funds are tax-deferred.
A variable life insurance contract is probably the most risky of any kind of life insurance policy, and should likely never be your only source of life insurance coverage.
Additionally, because of the investment risks, you must work with a life insurance agent who is licensed to sell this type of life insurance. These agents are called Registered Representatives, and must have either their Series 6 and 63 licenses, or a Series 7 license recognized by FINRA.
Simplified Issue Life Insurance
One of the most common ways a life insurance company can evaluate your health with detail is for you to go through an independent third party’s paramedical exam.
As it’s said within the industry, they like to know you look as healthy on the inside as you do on the outside.
The results of this paramed, which come from the blood and urine tests, help them to identify your risk, and this determines how much you pay for coverage.
But simplified issue life insurance coverage allows you to forego the medical exam. Hence, it is often referred to as a “no exam” life insurance policy.
You may still need to provide one or all of the following, though:
- Application & Questionnaire
- Motor Vehicle Record
- Medical Information Bureau report
- Prescription Database check
- Financial check
Some carriers may even require more information, depending on their underwriting criteria.
While a major advantage is skipping the paramedical, this convenience comes with a little extra cost.
Because they don’t have access to the data they get from your blood and urine, they are relying on less information, and less information is more risk.
More risk means higher premiums.
For the younger crowd, the difference in premiums is likely minimal. However, if you’re middle-aged or older, the difference could be quite substantial.
If you’re healthy and truly looking for the cheapest policy, take the exam and you will most likely save some money.
Guaranteed Issue Life Insurance
As the name implies, guaranteed issue life insurance is a type for which you cannot be denied.
Often referred to as final expense insurance or burial insurance, they are small, simplified issue policies but they come with even lower requirements to be approved.
You only need to fill out a valid application and make your payments – now you’re covered.
Of course, because the insurance company knows so little about you, expect to pay very high premiums and have limited or no access to large death benefits.
It’s not uncommon to see guaranteed issue policies be limited to a range of just $5,000 to $25,000 in death benefit.
Additionally, there’s a big difference with a guaranteed policy versus another you where you fully qualify – it may not pay out right away!
Many high risk applicants buy this type of coverage because it’s all they can be approved for. Because of this, there could be a 1 – 3 year waiting period for full benefits.
If the primary insured passes away during this time, the insurance company may only pay a fraction of the death benefit, or none of it, and just return the premiums paid plus a small amount of interest.
These limitations, along with the high cost of insurance, make these least desirable type of life insurance, though it’s the only option for some.
Group Life Insurance
Many people take advantage of insurance through their workplace.
Health insurance is the most common, but disability insurance and group life insurance plans are sometimes available, too.
A group life insurance option is a policy which is made available to an entire workplace, organization, or affiliation all under a single offer.
They come in many different forms, often varying by the size of the workplace and its eligible employees. They tend to be offered on a simplified or guaranteed issue format with very little, if any, underwriting.
The two largest variances are how much coverage you can take, and who pays for it. More often than not, you, the employee, pays the premium, but only if you elect to have the coverage through your human resources department.
The amount you’re eligible for is regularly calculated in one of two ways:
- A maximum number times your annual salary
- A maximum total coverage amount designated by the issuer
In both scenarios, there’s a limit to how much you can get, and it’s limited by the plan, not by how much you may actually need.
For this reason, even if it’s available through the workplace, you may need to search for your own private life insurance plan outside of work to fill in the gap.
NOTE: Not all life insurance is transferable if you leave the workplace. If not, you lose the coverage once you leave or are terminated from employment.
Certain occupations or positions may also have varying levels of benefits, too.
If you’re active duty military or a veteran, for example, your life insurance benefits are different.
Check with your workplace to see what is available, and always compare the cost per thousand that of a private insurer before having it payroll deducted. You may be able to save by getting coverage yourself.
Accidental Death & Dismemberment Insurance (AD&D)
Technically speaking, AD&D isn’t life insurance. This is because it will not pay out for all causes of death.
Rather, accidental death & dismemberment insurance only pays a benefit if you’re seriously injured or die from an accident. These policies will pay in addition to any other life insurance you have when it’s an accident.
Unlike the policies listed above, if you die of natural causes, illness, or similar, this type of policy will not pay anything to your beneficiaries.
This limited payout structure, however, makes it extremely affordable to have, since only a very small percentage of the population die in any form of accident each year.
You can purchase a standalone policy, or even add it as a rider to your existing life insurance.
Just know it is not a direct replacement for any other kind of life insurance.
Which Type Of Life Insurance Is Best?
Most consumers buy term life insurance.
It’s the cheapest, it’s simple, and it can be adapted to virtually any sized obligation between now and 30 years.
Of course, your situation, your budget, and your goals will ultimately determine which type of life insurance is the best fit.
