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The Main Types of Life Insurance: A Detailed Guide

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The Main Types of Life Insurance: A Detailed Guide

Life insurance is a staple for American households, with approximately 54% of adults in the US holding life insurance policies. Life insurance is a contract between you and the contractor that guarantees your family’s financial security should you die unexpectedly.

It’s important to put a lot of thought into the life insurance policy you choose. That’s because this insurance policy is what will determine your loved ones’ future after you pass on. The first step in choosing the right life insurance policy is knowing the different types of life insurance available.

Today’s post is a comprehensive guide on what types of life insurance policies exist for your consideration. This should help you make a more informed decision the next time you’re looking for life insurance. Let’s jump straight into it.

What Are the Different Categories of Life Insurance?

Before delving into the types of life insurance policies, let’s first look at the categories of this insurance policy. All types of life insurance break down into four major categories, and they are:

Term Life Insurance

This is the most common and popular kind of life insurance. It also has the simplest terms compared to other policies. A term life insurance policy pays your beneficiaries a fixed amount of money should you die.

However, a term life insurance policy only covers you for a specific period. If you die after this period, your beneficiaries don’t get a cent. That’s right; no death equals no compensation even if you paid a bundle in premium costs.

With term life insurance, you’re essentially paying the insurance company to protect your beneficiaries in case of your untimely death. Life insurance terms can be 10, 15, 20, 30 years, or sometimes more. You’ll pay the insurance company a premium for the specific term, and your family receives a death benefit should you die within that period.

Permanent Life Insurance

Permanent life insurance is the other category of life insurance policies. Unlike term life insurance, you’ll have to pay premiums for the rest of your life. The insurer will enforce the policy until your death or until you stop paying your premiums.

Permanent life insurance is more expensive than term life insurance. Your premium amount doesn’t change for the entire policy’s term. Your beneficiaries also get a fixed death benefit should you pass on.

Also, permanent life insurance policies have a cash value. This means that part of your premium acts as a tax-deferred investment and accrues with interest into a bulk payment that your beneficiaries receive when people die.

Level Term Insurance Policies

Like term life insurance policies, a level term policy covers your beneficiaries for a specific time. However, the premiums and benefit amount are the same with level term insurance policies even if you pass away. This is ideal for long-term agreements because while the premium remains the same, the coverage increases.

It’s worth noting that premium rates with term life insurance policies increase as they age. However, level term insurance policies have higher premiums than term insurance policies. Do the math and find out which one works for you.

Yearly Renewable Term Policies

These life insurance policies don’t have specific term limits. However, you have to renew the policy every year. This makes it an affordable option, but things might get more expensive further along the line.

What Are the Types of Life Insurance?

With that out of the way, let’s now look at the types of life insurance available for your consideration. The different types of lie insurance include:

Universal Life Insurance

Just like a permanent life insurance policy, universal life insurance policies have a cash value. However, universal life insurance policies are a tad more flexible than permanent policies with their flexible premium payments. It means you can use part of the cash value you’ve accrued to lower your premium amount.

In fact, if you’ve accumulated a substantial cash value, you might be able to do away with the premium payments entirely. However, there’s a trade-off for paying a lower or no premium at all. It means you have to sacrifice your cash value, which means your beneficiaries don’t get as much in benefits as they should.

Your universal life insurance may act as a long-term investment strategy, depending on how you look at it. Part of your premium covers your policy, while the other acts like your savings. This makes total sense, but this may not be the most feasible long-term investment option.

That’s because your insurer might hit you with hefty management charges that reduce your cash value. Plus, with the annual renewal term, most of your premium charges will go towards paying for the policy and not your “savings.”

With that in mind, it’s worth noting that universal life policies break down into three types:

  1. Guaranteed Universal Life Insurance: This type of life insurance has fixed premium payments. There’s also no cash value with this type of policy. You have to choose a specific age which you want the insurer to guarantee the death benefit.
  2. Indexed Universal Life Insurance: This policy has a cash value, but the insurer attaches it to an index on the stock market. The cash value can make gains, depending on the index’s performance. The policy will outline how much your cash value can increase using a particular formula.
  3. Variable Universal Life Insurance: With variable universal life insurance, the cash value is linked with particular investment accounts. They can be stocks, bonds, or mutual funds. You can adjust the premiums, but there’s no guarantee of a death benefit.

Variable Life Insurance

Variable life insurance is different from variable universal life insurance. Unlike the latter, variable life insurance has fixed premiums but is still tied to investment, typically a mutual fund. Depending on market conditions, you can make some significant cash, but you can also lose a lot of money.

This type of life insurance seems like a good investment option, but it has its downsides. For instance, you can only invest your cash value in the investment option the insurer offers. This limits you from exploring other more promising options.

This policy is also a tad riskier than the other alternatives. That’s because they’re too many variables in your cash value “investment” that may go either way. You could make a killing or lose it all.

Types of Underwritten Life Insurance Policies

Underwriting in insurance describes the process an insurer uses to determine how much risk they’re willing to accept and how much they’ll charge. With underwritten insurance policies, the insurers will underwrite the amount you’ll pay for the policy. Here are the common types of underwritten life insurance policies.

Fully Underwritten Life Insurance

This is among the most affordable life insurance options for healthy individuals. Part of applying for this policy requires a comprehensive medical exam. It also entails a deep look at your family’s health history, hobbies, and travel activities.

The state of your health and your family’s health history will determine how much the insurer will charge you for the policy. The greater your risk of passing on, the more you’ll pay the insurance company.

Simplified Issue Life Insurance

This type of life insurance doesn’t require a medical exam during the application process. However, your insurer might ask you a couple of questions regarding your health. How you answer these questions determines whether the insurer will approve you for the coverage.

The application process is much simpler than a fully underwritten life insurance policy. For instance, instant-approval life insurance utilizes big data, algorithms, and artificial intelligence to approve and decline applications. It also lets you how much your insurance policy costs in a snap.

Simplified issue life insurance is a popular choice for most individuals. However, it’s worth noting that the policy attracts a higher premium than other policies. Plus, its coverage is a tad limited compared to other types of life insurance.

Guaranteed Issue Life Insurance

As the name connotes, this life insurance is guaranteed by insurers. This means that you don’t have to worry about any medical examinations, health questions, and the like. As long as you’re within the age range, you qualify for coverage.

This is an excellent option for most because there’s almost zero chance of rejection. However, there are a few downsides to the policy. One of them is that the policy is slightly more expensive than other policies.

Also, the coverage is a bit low compared to the premium amount you pay. Lastly, your beneficiaries will only get partial death benefits if you die within the first few years of coverage.

Other Types of Life Insurance

Apart from the above, there are other types of life insurance policies you can choose from. These policies include:

Final Expense Insurance

Final expense or burial expense insurance is one of the most affordable life insurance options. It’s a type of mini life insurance policy that’s super easy to qualify for. The term final expense insurance may be a marketing gimmick, considering it’s the same as any other whole life insurance policy.

The only difference between this policy and other life insurance policies is the premium and benefit amounts. The death benefits should ideally cover funeral expenses, but the beneficiaries can use the money for anything. The policy is great for covering minor expenses but not long-term financial security for your beneficiaries.

Joint Life Insurance

Joint life or first-to-die insurance is a type of life insurance for couples. The policy covers both you and your spouse for the price of a single policy. The insurer pays the surviving couple a death benefit if the other couple dies, hence the “first-to-die” tag.

Joint life insurance makes a lot of sense for most couples because it gives the surviving couple much-needed security. However, there’s a tiny problem with this life insurance policy. It doesn’t take into account the income disparity in a couple.

That’s right; joint life insurance adopts a one-size-fits-all approach for couples’ salaries. That means you’ll have to pay a bundle in premium costs even if one of you earns a minimum wage. Remember, the purpose of life insurance is to replace the salary of one spouse should they die.

When you do the math, you may find that taking separate life policies makes a lot more financial sense. However, this depends on your unique situation.

Survivorship Life Insurance

Just like joint life insurance, survivorship or second-to-die life insurance is a policy that covers couples. However, unlike joint life insurance, the insurance company only pays out death benefits after both spouses pass away. It’s much more convenient and affordable than having separate insurance policies for each spouse.

Survivorship has a cash value that you can use as a form of investment. It’s also customizable with riders to fit your situation.

Is Life Insurance Worth It?

There’s always the question of whether getting life insurance is a good idea. The answer is a resounding yes. Life insurance is a great way to ensure the financial security of your loved ones if you die unexpectedly.

However, whether life insurance is worth it depends on your particular situation. If you don’t have anybody under your wing, there’s no need for life insurance. The same also goes for individuals with children who are fully grown and can take care of themselves.

That said, your life insurance policy is only worth it if you pick the right policy. Getting the right insurance will determine whether your death benefits will secure your beneficiaries’ future.

Pick the Right Policy for Your Loved Ones

Now that you know all the different types of insurance policies, it’s up to you to pick the right one for your needs. Weigh all the pros and cons of each policy and pick one that works for you. Your loved ones’ future depends on your choice.

Be sure to check out the other posts on the site for more informative reads.


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