There are many types of life insurance policies available on the market.
Chances are, regardless of your health or financial situation, there is an affordable type of life insurance out there that fits your needs.
For the most part, life insurance is separated into two main umbrella types of policies
- Term Life Insurance
- Permanent Life Insurance
Term Life Insurance
Term life insurance is a simple form of coverage that extends for a term, or length of time, usually between 10 and 30 years.
This type of life insurance policy is usually able to be converted into a permanent policy during its term, and can also be renewed annually as an annually renewable term (ART) life insurance once the term has expired.
Who Is Term Life Insurance Best For?
You should consider buying term life insurance if:
Overall, term life insurance is the most common type of life insurance policy sold today.
It is also the most affordable in terms of thousand dollars of coverage per dollar of premiums paid.
Typically, a $500,000 policy can be secured by healthy men and women in their 30’s for less than $50 per month.
The low cost and option to convert term life insurance to permanent life insurance, in the long run, makes it very attractive to first time buyers of life insurance, and people who are simply looking to provide financial support to their dependents in the event of their death as well as pay off remaining debts.
The Pros and Cons Of Term Life Insurance
Both term life insurance and permanent life insurance have their pros and cons.
Below outlines some of the pros and cons of term life insurance:
Pros of Term Life Insurance
- Great value, smaller premiums for large amounts of life insurance coverage
- You can match the length of the term to the length of your financial needs
- Term life insurance can be layered to last you throughout the various stages of your life
- Term life can be converted into permanent life insurance without the need to take a medical exam
Cons of Term Life Insurance
- Term life temporary, if you outlive the policy, you no longer have coverage
- The older you are taking out a new policy, the more it will cost you
- No cash value is accumulated with this type of life insurance policy
Permanent Life Insurance
Permanent life insurance provides lifelong insurance coverage.
These policies are more expensive than term life insurance policies because they are almost always guaranteed to pay out.
Coverage usually lasts until the end of life, or until the maximum policy age (usually 95, 101, or 121, depending on the company and policy).
Permanent life insurance offers a cash value accumulation component to it, which grows with the premiums you pay in.
This cash value can be borrowed against on a tax-free basis throughout the life of your policy.
Permanent life insurance can be divided into many subcategories of policies including:
- Whole Life Insurance
- Indexed Universal Life Insurance
- Universal Life Insurance
- Variable Life Insurance
- Guaranteed Issue Life Insurance
The main way that these different types of permanent life insurance policies differ is by the way that they accumulate cash value over time.
Some policies grow slower and more safely, while others offer riskier growth vehicles that can result in higher returns.
Whole Life Insurance
Cash value is accumulated directly from the company, who uses your premiums to invest on their own and returns gains to you in the form of cash value accumulation.
This has guaranteed level returns throughout the life of the policy. While these returns may be smaller than those of other permanent life insurance policies, they are always guaranteed and always remain the same.
Indexed Universal Life Insurance
Cash value is accumulated by the gains made on investments in various market indices such as the S&P or DJIA.
This has guaranteed minimum returns from investments. There is protection against market downturns and it provides potentially the highest cash accumulation.
Universal Life Insurance
Cash value is accumulated in the same way as whole life insurance, however, with universal life insurance, you pay excess premiums which are then credited to the cash value of your policy to grow with interest.
This is typically the lowest cost for permanent policies and minimum cash value gains are guaranteed.
Variable Life Insurance
The cash value fluctuates based on investment value, typically equity products. This is an investment vehicle, linked to the performance of a portfolio.
Variable life insurance cash value can be used to pay your premiums in months where you cannot afford it or do not want to pay them.
Also, you can pay excess premiums in the same way as universal life insurance, which will then increase your gains on the cash value of your policy.
Guaranteed Issue Life Insurance
This type of life insurance does not typically offer a cash value accumulation option. Guaranteed issue life insurance is also often called guaranteed acceptance, burial insurance, or final expense insurance.
It is designed to help people who are in poor health pay for final expenses in the event of their death. Policies are usually offered in small face amounts of $50,000 or less.
No medical examination is required for coverage and coverage can be obtained within 24 hours or less in most cases.
Who Is Permanent Life Insurance Best For?
You should consider permanent life insurance if:
Permanent life insurance is certainly much more expensive than term life insurance.
For most people, it is the type of coverage you want to get younger in life because the rates drastically increase as you get older because there is less time for you to pay your premiums until your life expectancy is reached.
Overall, the cash value accumulation of permanent life insurance policies is a very good added benefit, as it grows and can be borrowed against on a tax free basis, and is added to your death benefit when you die.
Permanent life insurance policies are certainly made for people who can afford a much higher monthly premium, and for that reason, they are less common on the market.
There is also much controversy over the value of permanent life insurance today when it comes to the overall return on investment of the policies themselves.
Many argue that unless you are specifically using your permanent life insurance policy for burial insurance coverage or for redistributing assets through a trust or estate, then permanent life insurance is not worth it, because you could make better gains even accounting for taxes by investing in the market and then purchasing the same amount of term life insurance coverage elsewhere.
Of course, the counter-argument to this is that term life insurance can only typically cover you to the maximum age of 85, where permanent life insurance offers life long coverage.
The Pros and Cons of Permanent Life Insurance
Both permanent life insurance and term life insurance have their pros and cons.
Below outlines some of the pros and cons of permanent life insurance:
Pros of Permanent Life Insurance
- Life long coverage
- Cash value is accumulated which can be borrowed against tax-free
- There is the potential to earn dividends with some companies (mutual companies)
- Permanent life insurance can be used for estate planning
- Many more options for policy riders and types of policy
Cons of Permanent Life Insurance
- Permanent life insurance policies are much more expensive than term life policies
- These policies may not be best for everyone because of their high cost
- It can be argued that you could make better gains by investing in the market on your own than with the cash value accumulation of your policy
Other Types of Life Insurance
No Exam Life Insurance
These are life insurance policies that require no medical examination and sometimes no health related questions.
No medical exam life insurance policies are offered in smaller face amounts, usually below $100,000 and are almost offered as permanent life insurance policies. They also have higher monthly premiums due to the higher health risk of the applicants for these types of policies.
No exam policies are designed to offer affordable life insurance coverage to people who have health issues, are denied traditional life insurance coverage, or who have an immediate need for coverage. These types of policies can often be issued in 24 hours or less with very little underwriting involved.
No exam life insurance comes in a few forms:
This is life insurance with no medical exam, but a few health related questions. Coverage ranges to about $50,000, but a few providers offer coverage as high as $150,000 and even $1,000,000 for people who are in good enough health.
For those who are denied simplified issue life insurance, guaranteed issue accepts anyone. As a result, higher rates are associated for this type of coverage.
Guaranteed issue life insurance is as the name implied, guaranteed. This is life insurance with no medical exam and no health questions required. Even people with severe health conditions can be approved for this type of life insurance coverage. As a result, these policies are the most expensive types of life insurance. Face amounts are small, and policy riders and options are also relatively scarce compared with other policy types.
Burial insurance is the same as guaranteed or simplified life insurance. It is exclusively offered as permanent life insurance. This is no exam life insurance with low face amounts. The difference is that these policies are labeled specifically for use with burial expenses.
Burial insurance is designed to cover final expenses such as:
Final Expense Life Insurance
This is a sub-type of burial insurance that is required to be spent specifically on final expenses.
Whereas burial insurance pays out the death benefit to the beneficiary, who can choose how it is spent, final expense life insurance policies outline the way that their death benefit should be used precisely.
This use is limited to expenses that are specifically related to final expenses like the ones listed above. Remaining death benefits are then the beneficiaries to use as they please.
Pre-Need Burial Plans
These are State regulated plans which are sold by funeral homes and cemeteries.
These plans have specific outlines for the cost and what the policies include. Each State has its own laws and regulations, which means that each funeral home must abide by their own state laws.
These plans are a convenient way to pre-plan a funeral so that your family does not have to worry about the arrangements in the event of your death.
Joint Life Insurance
Joint life insurance offers life insurance coverage for married couples.
These types of life insurance bundle you and your spouse into one policy under which you pay joint premiums in order to insure both of your lives under one policy.
For couples who are in excellent health, this is a great option that can save you money in the long run.
These policies come in both term and permanent options.
Survivorship Life Insurance
Survivorship insurance is called the “first-to-die” in some cases. It is a form of joint coverage for yourself and your spouse under one policy whereby the surviving spouse receives the death benefit. This is ideal if you want coverage for both yourself and your spouse.
Second-to-Die Life Insurance
This type of joint life insurance is only recommended for people who share an estate and plan to pass off their assets to their beneficiaries.
When the second spouse dies, the beneficiary receives the death benefit. As a result, this type of life insurance does not protect your spouse when you are gone, but rather pays out when you have both passed away.
Business Owner Insurance
These are similar to survivorship in that you can set them up so that the surviving partner receives the death benefit.
Having a business policy can protect owners from leaving behind business debt on the family shoulders or having to liquidate the company to settle an ownership dispute.
Key Person Life Insurance
This type of life insurance is designed for people who play a key role in the success of a business. Key person life insurance provides a death benefit to the remaining partners or the business in the event of the death of the insured partner.
This death benefit is designed to cover costs such as:
Life Insurance As Collateral Assignment
This type of life insurance can be purchased as either term or permanent life insurance but is typically purchased as term.
In this case, a policy is purchased by a company or an owner and then used as collateral for a loan.
In the event of a default on the payments of the loan, the life insurance policy pays out to the bank the remaining balance of the loan plus interest and fines.
Once the loan is paid off, the beneficiary of the policy is then changed, and the policy becomes payable to someone of the insured’s choosing.
Policy Riders For Life Insurance Policies
Policy riders are available for many traditional term life and permanent life insurance policies.
While the riders available vary based on company and policy type, these are some of the more common options offered by most providers on most policies.
There are plenty of other riders not listed here, but these are considered to be some of the most important life insurance riders that are offered on most life insurance policies.
Accidental Death Rider
This rider will pay out an additional amount of your death benefit if you pass away from an accident.
Waiver of Premium Rider
This rider allows you to waive future payments if you become permanently disabled or you lose your income.
Accelerated Death Benefit Rider
This rider gives you part of your total death benefits if you are diagnosed with a terminal illness and given one or two years left to live.
Child Term Benefit Rider
This rider lets you take out extra coverage for your children.
Long-Term Care Rider
This benefit will give you monthly payments that you can apply toward the cost of long term care.