Types of Life Insurance

A life insurance policy could pay your family a large sum of money if you died. This money could replace your income so your family could continue paying the bills and planning for the future.

For most people, a simple term policy will do. Term life can provide the most coverage for the least amount of money.

More complex types of life insurance exist to address more complex needs, either now or in the future when your term life policy expires.

What Are The Different Types of Life Insurance?

Here are the different types of life insurance:

• Term Life
• Whole Life
• Universal Life
• Variable Life
• Variable Universal Life
• Indexed Universal Life
• Simplified Issue Life Insurance
• Guaranteed Issue Life Insurance
• Burial Life Insurance
• Mortgage Life Insurance
• Key Person Insurance

The 2 Main Types of Life Insurance

All life insurance policies fall into one of two categories:

• Term Life: This coverage lasts only for a specific period of time.
• Whole Life: This coverage can last for the rest of your life.

Term Life Insurance

When you buy term life coverage, you’re entering a contract with a built-in expiration date. During the term, you agree to pay regular premiums in exchange for your coverage. If you died within the term of your policy, your beneficiary could file a claim and receive your coverage amount.

Your beneficiary could use the tax-free money as he or she needed.

Here are some facts about term life to consider as you shop:

• Term Length: Terms usually range from 10 to 30 years, though some life insurance companies offer 5- or even 2-year policies.
• Coverage Amount: Term policies can offer up to $3 million or more in coverage — much more than a whole life policy typically provides.
• Beneficiary: Choose who would receive the policy’s death benefit if you died with the coverage in force. Usually, your beneficiary is your partner, your children, or a close friend.
• Medical Exam: Life insurance exams typically include blood and urine tests, weight & height checks, and a blood pressure test.

Whole Life Insurance

With a whole life — also known as permanent life — policy, you’re entering an insurance contract that can last the rest of your life. Whole life is more complicated and more costly, and it’s also more flexible.

The flexibility comes from the cash value your whole life policy will accrue over time as you pay premiums.

Types of Permanent Life Insurance

Unlike term life, a permanent life insurance policy grows in value as time passes.

With a standard whole life policy, your cash value works like a savings account growing at a moderate interest rate.

When the value gets large enough, you can borrow against it or cancel the policy and receive the cash minus surrender fees. Some policyholders use whole life as part of their retirement planning.

There are other ways to use the cash value in your permanent life insurance policy, for example:

• Universal Life: With Universal Life, you can use your policy’s cash value to lower your premiums or increase your death benefit later in life.
• Variable Life: Invest your policy’s cash value in mutual fund accounts with a Variable Life policy.
• Variable Universal Life: Both invest your cash value and — assuming the value grows — use the money to change the amount of your premiums or death benefit.
• Indexed Universal Life: With an IUL policy, you can connect your cash value to a stock index and — assuming the value grows — use the money to change the amount of your premiums or death benefit.

Universal Life

Over time, universal life lets you change the relationship between your policy’s death benefit and cash value.

When you have enough cash value built up, you could even stop paying premiums by using your cash value to keep the policy active. You may need decades to get to this point, though.

One of the main benefits of universal life: the ability to keep permanent life insurance but pay a lower cost for the coverage later in life.

Variable Life

Your cash value could grow more quickly in a variable life policy because you can invest the money.

This kind of investing has its limits. Your insurance company will provide a list of mutual funds in which you can place your cash; you don’t have total freedom to invest as you see fit.

The insurer will also cap your money’s growth rate. Some, but not all, variable life policies prevent you from losing all of your cash value.

Variable Universal Life

As the name implies, variable universal life insurance combines elements of variable life and universal life policies.

Like universal life, you can eventually change the relationship between your cash value and your death benefit, lowering premiums, or increasing your death benefit.

Like variable life, you can invest the money in insurance company-directed mutual funds.

Indexed Universal Life

With indexed universal, you can connect your cash value to a stock index such as the S&P 500. The money can grow at the same rate as the stock index.

As with variable universal, the insurance company can cap your growth at a specific percentage during a hot streak in the markets. And, when your cash value grows enough, you can use it to subsidize your premiums.

There Are Multiple Ways to Apply for Life Insurance

Whether categorized as whole or term, life insurance policies can have different application processes.

Medically Underwritten Life Insurance

Medically underwritten life insurance almost always requires you to take a medical exam.

The exam will calculate your body-mass index, get your blood pressure, and take blood and urine samples to test your overall health.

The medical exam can be a big hassle, but its data tells life insurance underwriters a lot about your health. If you are healthy, the exam can unlock significant savings because your insurance company will have proof you’re healthy.

Some startup online insurance agencies such as Bestow, for example, can now issue medically underwritten term life coverage without an exam if you’re younger than 45 and your database checks don’t reveal evidence of health concerns.

Simplified Issue Life Insurance

Simplified issue life insurance lets you skip the medical exam, whether you’re buying whole or term life.

Instead of a medical exam, underwriters will ask a variety of questions about your health and your family’s health history.

Underwriters may also check databases to find out what kind of medicines you take or have taken. They can check how safely you drive, and they can also see the results of any previous life insurance applications or health exams.

Expect to pay more for this kind of coverage, and expect lower coverage amounts. Simplified issue life insurance tops out around $350,000 to $500,000 — significantly lower than a medically underwritten policy.

Guaranteed Issue Life Insurance

Guaranteed issue life insurance resembles a simplified issue, except you’ll answer only a couple of questions.

Just about anybody can qualify for a guaranteed issue, which explains the name. Some people also call this “last resort” life insurance.

Coverage is expensive, and death benefits rarely exceed $50,000. You’ll also have to wait a year or two before the death benefit becomes available to your family.

Different Types of Life Insurance

Here are some additional, unique types of life insurance coverage that may fall into one or more of the above categories.

Burial Life Insurance

Burial life insurance is usually a form of guaranteed issue life insurance, though you could buy a simplified policy for this purpose.

This type of insurance should be a whole life policy, so you don’t have to worry about outliving the coverage.

The death benefit should be significant enough to pay your final expenses, which may include small debts or funeral expenses.

Mortgage Life Insurance

Mortgage life insurance offers arrive in the mail when you buy a home. These simplified issue policies could pay off your house if you died with a mortgage balance.

Term life offers a more flexible and affordable way to protect your home, especially if you’re young and healthy.

A mortgage life policy would pay your lien holder and not your family if you died.

Key Person Insurance

Almost every business that relies on its personnel has a need for key person insurance.

This type of coverage can protect your business if a partner or key employee died unexpectedly. With the death benefit from a key man policy, your business can regroup and rebuild following the loss of critical company personnel.

What Are Life Insurance Riders?

Life insurance riders can help you customize your insurance coverage with extra features.

Common riders include:

• Accelerated Death Benefit: Can pay part of your death benefit early if you’re diagnosed with a terminal illness or meet other requirements.
• Long-Term Care: Can pay part of your death benefit early if you need help paying for long-term health care.
• Accidental Death: Pays a higher death benefit if your death results from a qualifying accident.
• Child Term: Can extend part of your coverage to one or more of your children.
• Waiver of Premium: If you outlive your term policy, this rider could return your paid premiums.

Riders will always add extra costs to your insurance premiums.

What Type of Life Insurance Should I Buy?

As I said up top, term life works best for most millennials who need to protect their families from the money trouble that could result if they died unexpectedly.

When Do I Need Term Life Insurance?

A medically underwritten term life policy can let you carry $2 million, $3 million, or possibly even more in coverage for the next 20 or 30 years as your family grows.

If you don’t have a lot in savings and you don’t have sources of income other than your job, this kind of coverage can be just what you need.

With a comprehensive, medically underwritten term policy, your partner could use your death benefit to pay off the house, get out of debt, save money for the kids’ college — or pay for anything else you had planned to do in the coming years.

When Do I Need Whole Life Insurance?

If you already have the money set aside to keep your financial house in order in case you die, you may not need life insurance, or you may want to consider a permanent life insurance policy.

Though it has lower coverage amounts and more expensive premiums, whole insurance can offer more flexibility, some tax advantages, and a permanent asset.

A financial planner or independent life insurance agent can help you make these decisions.