Different Types Of Life Insurance Policies In 2019 // Explained In Detail
When you are trying to secure your families financial future, figuring out the type of life insurance you need is essential.
While there are several different types of life insurance, they can all be divided into either term or permanent.
With he only difference being how they actually function.
In this post today I will go over all of the different types of life insurance, how they work and the pros and cons of each one.
The different types of life insurance plans include:
Term Life Insurance
Term life insurance is one of the primary types of life insurance and is going to be what people think of as the most straightforward type of life insurance.
The way term life insurance works is that you pay a set monthly premium (like $30.00 per month), for a specific amount of coverage (Like $100,000), for a set period or term length (Like 20 Years).
If you live past the term length, the policy will end, or you can renew it on an annually renewable basis at which time your premiums can increase.
If you pass away before the term ends, 100% of the coverage (or death benefit) will pay out to your beneficiaries.
Term life insurance quotes tend to be more affordable than permanent life insurance policies.
Some of the policies that we discuss below, at their core, will be term life insurance policies; however, they will have a few differences.
Now, you should be able to see what makes this the most basic life insurance product.
Whole Life Insurance
The other primary type of life insurance is what is known as whole life insurance.
Whole life insurance is a type of permanent life insurance, and it will last for your entire life.
Unlike a term life insurance policy, you can also build what is known as cash value inside of a whole life policy.
When you make monthly premium payments into your policy, a percentage of those payments go towards building up cash inside of your policy.
With this cash, you can use it to help pay monthly premiums or to borrow against in an emergency.
The way whole life insurance works is that you pay a set monthly premium (like $90.00 per month), for a specific amount of coverage (Like $50,000), for your entire life.
When you pass away, the death benefit will pay out 100%, and if you have allowed your cash value to build, that will pay out in addition to your death benefit.
Term Life Vs Whole Life Insurance
This is an age-old battle that you will definitely run into when trying to decide the best type of life insurance for you.
It really comes down to which option you can afford and also what role life insurance will play for you.
Will you try to treat it as an investment or will you use it simply as it was intended to be used for, which is to insure your life.
We have a detailed guide where over 40 personal finance experts pick a clear winner between term life vs whole life.
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Permanent Life Insurance
Permanent life insurance can be a bit more complicated than term life insurance because it builds cash value.
Whole life insurance is a type of permanent life insurance, this is important to understand because whole life isn’t the only type of permanent life insurance.
All permanent life insurance policies can last for your entire life and build cash value in some way or another.
Some of the policies that we discuss below, at their core, will be permanent life insurance policies; however, they will have a few differences.
Return Of Premium Life Insurance
IN THIS ARTICLE
Return of premium is a type of term policy that will return all of your premiums that you paid into the policy when your term ends.
Think of it as a hybrid mix between term and permanent life insurance.
The premiums are still more affordable than a whole life policy, but they are a bit higher than a basic term life insurance policy.
The way a return of premium term life insurance plan works is that you pay a set monthly premium (like $75.00 per month), for a specific amount of coverage (like $250,000), for a particular term length (like 15 years).
If you pass away before the term length is over, the policy will pay out 100% of the death benefit to your beneficiary.
If you outlive the policy and live past the term, the insurance company will cut you a lump sum check for all the premiums you paid into the plan.
Using the above example of $75 per month for 15 years, you would get a check back for $13,500.
These policies can be sold as individual policies or come as a rider on a traditional term life policy.
Universal Life Insurance
Universal life insurance is a type of permanent life insurance policy and has a cash value, just like a whole life policy.
Your monthly premiums go toward both your cash value and your benefit.
But there’s a bit of a twist:
The policyholders of universal life policies can change the monthly premium and death benefit amounts without getting a new policy.
While you do have a minimum premium, you have to pay to keep the policy in force, you can use the cash value to pay the premium.
So, if you have enough money in the cash value, you can use that to skip premium payments entirely, letting the accrued interest make the payment.
Another thing that makes a universal life policy different is that it has interest rates that are affected by the current market interest rates.
If the interest rate that is being used to credit your policy sees a decrease on the minimum rate, your premiums would have to be offset by an increase in your monthly premiums and offset the reduced cash value.
The fact that you can make several changes to this policy is what makes it unique but also hazardous if you don’t fully understand it.
Guaranteed Universal Life Insurance
There is also a subset of universal life insurance known as Guaranteed Universal Life Insurance.
This policy is a type of permanent life insurance that offers a guaranteed no-lapse rider.
This rider guarantees that the policy remains in force even if the cash value drops to zero.
Upon the death of the insured, the lump sum death benefit is paid income tax-free to the policy beneficiary.
The policy can be tailored to end at a certain age, such as 90, 95, 100, 105, 115, or 121.
These policies are still more expensive than term life but a bit more affordable than a traditional whole life policy.
Variable Life Insurance
The primary difference between variable life insurance and whole life is how the cash value property works.
With a whole life insurance policy, the cash value works as a savings account.
That’s why, even through the growth might be small compared to other types of investments, there is a guaranteed minimum rate.
It also will include dividend payments from the life insurance company
The cash value of a variable life insurance policy, however, functions more like an investment product.
It's basically a series of mutual fund-like sub-accounts where you can get some decent growth, but you can also lose money depending on the market.
This product is super complicated for the average individual and I would recommend speaking with a licensed agent about your options.
No Exam Life Insurance
No medical exam life insurance can be either a term life or permanent life insurance policy.
These policies will not require you to take a medical exam to be approved.
However, you will mostly find these types of policies to be offered as term life products.
While these policies won’t require an exam, they still go through the remainder of the underwriting process.
Such as requesting medical records, telephone interviews, and can take a few weeks to get approval.
No exam life insurance can also have other benefits like instant approvals and immediate decisions.
Those policies are known as Simplified Issue No Exam life insurance policies which we discuss below.
Simplified Issue Life Insurance
Simplified issue life insurance is most commonly a type of term life insurance that allows you to get approved for life insurance extremely fast.
These policies are often called No Exam life insurance policies; however, they go a bit further with eliminating things from the underwriting process.
With a Simplified Life insurance policy, along with no medical exam, you also get to avoid a telephone interview, medical records, and a lengthy application process.
Insurance companies access your personal data from several companies to make an instant decision on your insurability.
The leading companies are the Medical Information Bureau (MIB), Intelliscirpt for your prescription drug history, and your Motor Vehicle Record (MVR) to check your driving history.
A simplified issue life insurance policy can offer you term life insurance coverage in as little as 5 minutes.
Check out the comparison of the two products below:
Accidental Death Insurance
Accidental death insurance is a type of life insurance that will only pay out if you pass away from an accident.
These policies will not require you to go through underwriting so are basically guaranteed approval types of policies.
The way an accidental death insurance plan works is that you pay a set monthly premium (like $6.00 per month), for a specific amount of coverage (like $100,000), until you reach a certain age (Usually 65).
If you pass away from anything other than an accident, the policy will not pay out.
You can purchase these policies separately or as a rider in addition to a traditional term life insurance.
If you purchase accidental death insurance as a rider on a term policy, it will pay out on top of your life insurance if you pass away from an accident.
So, if you have a $100,000 term policy with a $50,000 accidental death insurance rider and you pass away from an accident, the policy will pay out $150,000.
If you pass away from a heart attack; however, the policy would only pay out $100,000.
Final Expense & Burial Insurance
Depending on who you are speaking with or what keywords you typed in Google, you might see final expense insurance or burial insurance.
These two types of policies are precisely the same, they just go by two different names.
Final Expense and Burial Insurance are both types of whole life insurance policies that focus on people between the ages of 50 to 85.
These policies won’t offer more than $25,000 in death benefit and are much easier to get approved for if you can’t get a traditional life insurance policy.
The idea is to use these policies for your final expenses or burial and usually nothing more.
Guaranteed Issue Life Insurance
A guaranteed issue life insurance policy is any type of life insurance product that doesn’t require you to answer health questions for approval.
While these can be both term and permanent policies, you will see a guaranteed issue policy more geared towards seniors as whole life policies.
It is usually the final option if you can’t get approved for a traditional life insurance policy or a final expense policy.
These policies have a 2 to 3 year waiting period on them before they will pay out the entire death benefit.
Always ask how long the waiting period is if you decide to get this type of policy.
If you pass away before the waiting period, the policy will only pay out the premiums you paid into it plus a few percentage points.
Key Person Life Insurance
Key person insurance is just life insurance on the "key" or primary person in a business.
In a small business, this is usually the owner, the founders or even a key employee or two.
If the death of someone in your business would mean the business falls apart, then you probably should have key person life insurance on them.
These policies function just like traditional life insurance policies and you just need to let the insurance company know that you are interested in that type of policy.
What life insurance policy type is best for me?
In my honest and professional opinion, Term life insurance is usually the best option for most people who need life insurance.
Term life insurance is going to be the most affordable and easy to understand with straightforward protection.
We have a great guide on how term life insurance works that you can check out if you don’t know where to start.
If you want to purchase your life insurance fast and still have the lowest rates, then check out our best no exam life insurance companies.
Now, this doesn’t mean that other types of life insurance aren’t suitable.
For instance, if you don’t like the idea of losing your money at the end of your term, then the Return of Premium term life policy would probably work best for you.
If you can’t qualify for traditional life insurance, then you might need the guaranteed issue life insurance policy.
And if you only care about taking care of your burial or final expenses, then you should be looking into Final Expense or Burial insurance.
In the end, you should do some research online or speak to a licensed independent insurance agent or financial advisor to figure out which policy is right for you.
Knowing the pros and cons of each option will make you more fit to decide which coverage option will be best for you and your family.
Remember, life insurance is for those that we leave behind, not for ourselves.
Sa El is the Co-Founder & CEO of Simply Insurance. He is a Licensed Life and Health Insurance Agent with over 11 years of experience in the industry. He is an Entrepreneur, Insurance Educator and Field Underwriter. Sa is on a Journey to get 1 Million Families insured.