When many people think of life insurance policies, they usually don’t think of all the types of life insurance, they only think term.
You can think of it like In-N-Out Burger, my most favorite burger joint ever.
Other than having the best tasting burger around, I’m also very intrigued by their simplistic menu.
Only offering the basics – burgers, fries, drinks, and milkshakes – it’s minimalist menu does not overwhelm me to the point of where I have no idea what to order. Taco Bell on the other hand….yikes!
Term life insurance policies are the simplest, most popular, and the most often purchased, but; in the life insurance menu of options it’s not the only choice. Far from it, actually.
Today, there is a wide variety of life insurance available, the most basic of which are term and permanent. Within each of these categories, however, there are many different types to choose from – and being familiar with these can help you better customize the coverage to meet your specific needs.
11 Different Types of Life Insurance Policies on the Market Today
Term Life Insurance Policies
Term life insurance is considered to be the most basic of life insurance that can be purchased.
This is because term life offers just pure death benefit protection only, without any cash value builds up within the policy.
Because of this, term life insurance is often very affordable – especially for those applicants who are younger and in good health at the time they apply for the coverage.
With term life insurance, coverage is purchased for a certain length of time, it could be as short as a 5 year policy, if you purchase or a short term life insurance plan or longer terms such as for ten years, 15 years, 20 years, 25 years, 30 years – and in some cases, even longer.
There is also a 1-year renewable term life insurance option that is offered by many of the best life insurance carriers.
Typically, when purchasing a level term life insurance policy, the amount of the premium will remain the same throughout the period that the policy is in force. Provided that the insured survives throughout the time period of the policy, and he or she wishes to remain covered by life insurance, they will need to re-qualify for a new policy at their then-current age and health status.
At that time, the premium on a new life insurance policy may be quite a bit higher. In some cases, a term life insurance policy may have an option to convert the coverage over into a permanent life insurance plan.
Related Post: How much does a million dollar life insurance policy cost?
Increasing and Decreasing Term Life Insurance Coverage
On some types of term life insurance, the death benefit will go down over time. These are known as decreasing term life insurance policies. (The premium, however, will usually remain the same). With a decreasing term policy, the policy ends when the death benefit reaches zero.
An individual may want to purchase a decreasing term life insurance policy to cover the balance of their unpaid mortgage. Each year, as the amount of the mortgage balance decreases, so does the amount of the insurance coverage – until eventually, both will end.
There are also term policies where the death benefit increases over time. Often, this benefit will be purchased as a cost of living rider on the policy. A young parent may consider this type of policy as their coverage needs increase.
Permanent Life Insurance Coverage
Permanent life insurance is different from term insurance because it offers both death benefit protection, as well as a cash value component. It also differs because, as the name suggests, it does not have a time limit like term insurance, but rather is intended to last for the remainder of the insured’s lifetime – provided that the premium is paid. There are many different types of permanent life insurance.
Whole Life Insurance Coverage
The simplest type of permanent life insurance coverage is whole life. With this type of coverage, the premium amount is locked in and will remain the same throughout the entire lifetime of the policy.
This can be helpful for those who need to stick to a budget. It also means that if a person purchases a whole life policy at a very young age, they will still pay the same amount of premium when they get older – regardless of advancing age, or even an adverse health issue.
In some cases, where a person’s pre-existing conditions require the individual to buy high-risk life insurance, some graded whole life policies are the only option.
The cash that is in the cash value component of a whole life insurance policy is allowed to grow on a tax-deferred basis. This means that the gain on these funds will not be taxed until or unless they are withdrawn – allowing them to compound exponentially over time.
At first, the cash in a whole life insurance policy will grow slowly. This is because the majority of the early premium dollars will go towards paying the agent’s commission and the insurance costs. However, over the years, the cash in a whole life policy can steadily grow, often with a minimum guaranteed rate of return.
Some whole life insurance policies will even provide dividends to their policyholders. Because these are considered to be a return of premium to the policyholder, they are also not taxed. Dividends can also help the cash value in a policy grow significantly – although they are never guaranteed.
Related Post: Term vs. Whole Life Insurance coverage
Universal Life Insurance Coverage
Another form of permanent coverage is universal life insurance. This type of life insurance also provides a death benefit and a cash value component where the funds are allowed to grow tax-deferred.
Universal life insurance is more flexible than whole life coverage, though. This is because the policyholder is allowed – within certain guidelines – to choose how much of his or her premium dollars will go towards the policy’s death benefit, and how much will go towards the policy’s cash value.
Because universal life is a permanent life insurance policy, the policyholder will have access to their cash value account. So, just as with a whole life plan, the cash can be borrowed or withdrawn for any reason – including paying off debt, supplementing retirement income, or even going on a vacation.
There is also an Indexed Universal life insurance policy available that will can aggressively grow your cash value in the policy over time, but you have to be aware of the disadvantages of this type as well.
Related Post: Whole Life vs. Universal Life Insurance
Variable Life Insurance Coverage
Variable life insurance is also a form of permanent life insurance coverage. These types of life insurance policies offer a death benefit, as well as a cash component.
However, with variable life insurance, the policyholder can take part in a variety of different investment options such as equities.
This means that their funds have the opportunity to grow a great deal more than the funds in a whole life policy can. It also means that there can be more risk as funds are exposed to the ups and downs of the equities market.
It is important to note that while the policyholder can increase their funds based on market movements, their cash is not invested directly in the market. Rather, it is invested in “sub-accounts” by the insurance company.
With a variable life insurance policy, the death benefit may go up or down – however; it will not go below the set guaranteed amount. This is usually the original amount of death benefit that is purchased at the time of policy application.
Variable Universal Life Insurance Coverage
Variable Universal life insurance is similar to regular universal life insurance coverage, except in this case, the policyholder is allowed to invest the cash in their policy into different types of investments such as mutual funds. Also, there will be no guaranteed minimum cash value in this type of policy.
Survivorship Life Insurance Coverage
With a survivorship life insurance policy, there is more than one person that is covered.
These policies can be set up in a couple of different ways. One way is first to die. With this type of policy, the coverage is designed to pay out when the first person passes away.
In most instances, the premium that is charged for this type of policy can be higher than for a policy on just one insured. However, it can often be less than purchasing two separate life insurance policies.
There are also joint and survivor, or last to die life insurance policies. With these policies, the coverage pays out when the second person on the coverage passes away. These can either be term or permanent coverage.
These policies can also have other advantages, too, in that they typically will cost less than two separate life insurance policies, and they may have less strict underwriting criteria – especially if one of the individuals is in very good health.
Final Expense Life Insurance Coverage
Final expense life insurance coverage is often called burial insurance and is purchased by those who are considered “seniors,” or between the ages of 50 and 85 – although there are some insurance companies who will sell policies to applicants who are older.
This type of coverage is typically geared towards those who want to ensure that their loved ones will not be saddled with the high cost of a funeral and other related expenses such as a headstone, burial, flowers, and memorial service.
Today, the average cost of such items nationwide can be in the range of $10,000 – an amount that many families just simply do not have readily available. So, a final expense life insurance policy can help.
Final expense coverage can be either term or permanent – and oftentimes the underwriting requirements are not stringent. Also, the premium cost for this type of coverage is usually not high, even though the applicants are usually older.
If your health is something which prevents you from getting approved for a common burial policy, there are plans still available which don’t require an exam or questionnaire of any kind.
No Exam Life Insurance Coverage
As its name implies, no exam life insurance coverage will not require that an applicant undergoes a medical examination as a part of the underwriting process. In many cases, when applying for life insurance, individuals must meet with a paramedical professional who will ask them in-depth health questions and will also take from them a blood and a urine sample.
Because of this, those who have certain types of adverse health conditions may be denied for the life insurance that they need. But, with no medical exam coverage, they could be approved for the coverage that they need – and, because there are no medical underwriting requirements to contend with, these policies are often approved within just a day or two after application.
While no medical exam life insurance is the best option for some, we do recommend that if you feel you could pass the medical exam, that you do try that so that you can achieve lower premium rates.
Key Man Life Insurance Coverage
Key man life insurance, or corporate-owned life insurance, protects a company in the event of the loss of an employee who plays a significant role in the business.
Employees covered by this type of life insurance might include executive officers, specialized skill players, and highly effective members of the salesforce.
Key man policies are unique in that the beneficiary and the policyholder are one in the same. The company simply informs the employee they will be purchasing a policy to insure them. With the employee’s signature in hand, they can purchase a policy.
Key man insurance can provide companies with a solid source of protection for their businesses.
Understanding the “Cash Value”
When an insurance policy contains a guaranteed cash value for a guaranteed premium, it means that the premium is larger at the beginning of the policy than it would be in a term policy so that the additional premium can be invested in a “separate account” controlled by either the insurer or the policyholder in order to grow the cash value.
Whatever gains are earned can be used in a few different ways: to increase the death benefit, to borrow against for some later use or to keep the policy in effect so that you can stop paying monthly premiums. If you have a cash value policy, it’s best to hold it until death or retirement so you can allow for probable gains.
A Closer Look at the Tax Benefits of Life Insurance
These tax benefits within a universal life insurance policy are similar to 401ks and IRAs. Annual earnings on the investment part of the policy don’t get taxed, and any taxable gains when cashing out on a policy can be reduced by the amount of insurance protection the plan provides. Furthermore, in the case of death, the policy holder’s gains usually aren’t taxed.
Such policies can offer a range of investment options, including stocks, bonds, balanced mutual funds, international mutual funds and money market accounts. When deciding to invest, work with an advisor just as you would a financial advisor, and always invest just as much as you foresee needing, neither more nor less.
How to Get the Best Premium on All Types of Life Insurance Coverage
Without life insurance, hard-earned assets and savings that were intended for other purposes may have to be used for paying off debt, funding living costs, or paying the high cost of one’s final expenses – which today can average more than $10,000 in some areas.
Getting a set of quotes on life insurance is as simple as filling out the form on the side of this page. Unfortunately getting quotes for all the different types of life insurance available to you is going to take talking to someone.
While this works great for most people, if you really want to look at other forms of life policies then wait for the agent to contact you (we only have one agent contact you) and then ask them to do quotes for the different options you desire.
In the past, there were only a few types of life insurance policies to choose from. However, as time has passed, many insurers have added to their array of product options. This has allowed individuals and families to find coverage that is best for them and their budgets.
Ultimately you need to decide which type of life insurance policy is best for your needs. Understanding how each one works will make sure you make the right decision.
With all of the many types of life insurance and carriers to choose from today, it can help to have an ally on your side who can help you choose the coverage that will fit your needs the best. So, contact us today – we’re here to help.
Geoffrey Sadler says
This is an unusually detailed, comprehensive article — I’d say necessary reading for anyone looking to buy, change, sell, cash out a life insurance policy!
Douglas McCorquodale says
I am 71 and completing my will, etc., I have had a Whole life policy for many years, My question is what happens to my policy now? Do I just keep paying the annual premium or is there a point where the insurance ceases coverage and I just take the accrued value?
Jeff Rose says
Hi Douglas – There’s usually several options. You may be able to cash out the policy. Or you may have enough cash value/dividends that the policy will pay for itself (dividends pay the premiums, so you don’t have to). With whole life, the coverage doesn’t stop unless you stop making the premium payments, so it’s essentially permanent.
Joan Anderson says
I bought a life insurance policy on my granddaughter when she was a baby and was told it was paid up in 10 years and it would pay $10,000 when she died, no matter what age. I was going to drop it but in insurance person told me it would be paid up in a couple months so I kept it until it was paid up. What kind of insurance is that called?
Jeff Rose says
Hi Joan – Paid up life insurance. Most likely, it’s some form of whole life policy that’s built up enough cash value that the premiums can be paid out of the dividends from the policy.
Coast says
My boyfriend is 51 and in good health but does smoke cigarettes we are trying to find a good policy to take care of him if something happens where I can afford funeral cost and take care of me also if he goes before me any suggestions ,
Jeff Rose says
The best course of action is to work with a reputable life insurance broker. He or she should know of some companies that have a more favorable view of smoking. You’ll still pay more for the policy, but you want to minimize the rating, and the premium. It does vary somewhat by company.
Arlene Solum says
I’m looking at a whole life policy application and it has abbreviations for riders/supplements (difference?). Where do I find explanations (good web site) for insurance abbreviations: W.P. Dis GDI ADD CMTI DI GIO FIIA CIA others. Help, and thank you.
Arlene
Jeff Rose says
Hi Arlene – You can try this site for abbreviations. Otherwise search on Google for more specific ones.
Mari Richardson says
Thank you for this article. Studying for my Life Exam and I’m using this as a guide. 😀
Gabriel says
Very good article, most people don’t understand the options and most insurance agents don’t either. I believe using the whole life to leverage investments in real estate can help you minimize the effect of interest paid to banks and by doing it right and structuring the policy to maximize the cash value it can compound pretty well over time.
Steveark says
I’m retired and my wife is still maintaining a hefty term life insurance policy on me even though we are financially independent. Kind of makes me nervous to be worth more dead than alive. Especially when we hike those mountain trails with the cliffs!
Tim Kim @ Tub of Cash says
My wife and I are laddering 20-year term life insurances. And every additional kid, we’re going to continue adding on additional coverages up until it starts to get too expensive. I think we’ll stop laddering once we hit our mid thirties. And by then we should be able to self-insure for most scenarios. Similar with disability insurance.
John dinanno says
Am interested in term life
Jeff Rose says
@ John You can either fill out the quote form on the site or contact our office direct. Happy to help!
delores boeri says
I like to know if I had a policy life, till I turned 70 and they upped my payment and I had to drop it because the payment was too high, am I able to get any money back I cancelled
Jeff Rose says
Hi Delores – Not generally. You probably had a term policy in which case the premiums do escalate with age.
Bobby says
I love that you have put together a post regarding life insurance. There are alot of choices and reasons to do term or Cash Value Life Insurance. Keep up the good work my friend!!
Cash Value Life Insurance can be an amazing tool if constructed properly!! 🙂 🙂
Church says
I 100% agree with Bobby regarding the cash value in whole life and permanent policies. I understand all the frustration and hate around why its a bad investment, but I don’t view it as an investment. For me, it’s a financing vehicle that offers a variety of liquidity to leverage off of. I opened up my first policy when I was 23. Now, at 37, I have just opened up my 7th policy and am really starting to see the power these vehicles come with, if properly structured. I don’t believe I have paid an additional cent of premium since policy #4.
It’s not for everyone, but when done right, you get why people wouldn’t go down this path and those who did, swear by it. If anyone is wondering, it is just a piece of my overall portfolio. I still max out the 401(k), have IRAs, invest in real estate etc etc.
***DISCLAIMER: I DO NOT sell insurance or have any affiliate links to promote and market insurance products of any kind***
Bets says
Church,
WOW, I think that’s great! I wish I could understand or had an insurance agent take time with me to invest like you! I had an insurance policy Franklin Life I barrowed one time only! And it wasn’t that much! I had it since I was 15 years old! When I started making payments on the Universal Life Insurance Policy they CANCELED IT OUT! I just turned 42 years old! It was growing so much money! I couldn’t believe they could cancel my policy? I just been really hesitant to go to any INSURANCE PLACES AFTER THAT it was horrible. Where did all my money go???
I still wonder today?? I paid $35.52 a month. And all of sudden the insurance company and I barrowed $1000.00 from it. There was a bunch more in my account? But I became really ILL and I phoned the company etc? I didn’t even have to pay my premium but I did anyway because I didn’t want this to happen! I really thought when I was 15 and signed up for the account it was an excellent idea! And a great retirement investment! Can anyone tell me has this happened to anyone or why it did? Please email me! Thanks god bless everyone
Cristina says
Sometimes it’s difficult to get a reliable and trustworthy life insurance coverage company. So it’s easier to request our co-workers, friends and relatives. Also we can search at website. We are able to even request our doctor for advice particularly in assisting you determine which kind of insurance plan we will need later on.
Melissa@LittleHouseInTheValley says
We opted for term life insurance and will stack them. When the first 20 year policy is 10 years old, we will take out another 20 year policy, so that for the 10 years in the middle, we will have double coverage. By the time the second policy expires, our youngest will be through college, and we should have enough money to self-insure, so to speak.
Lily says
Term does not have cash benefits.