Most consumers when they think about life insurance, term life insurance is the first option that comes to their mind. Many consumers are familiar with term life policies and term life is the easiest to understand.
Even though term life insurance is the most popular and purchased the most, there are many more life insurance options to choose from. In this article we are going to dive into each type of life insurance product to give you a better understanding of what options are out there.
Types of Life Insurance:
With all the options you have for life insurance today, it’s easy to get confused. Always remember that life insurance will fall into two categories, which are term life insurance and permanent life insurance.
There are many variations to choose from when it comes to term life and permanent life insurance. Knowing your options will help you choose the right life insurance policy that fits your needs and the needs of your loved ones.
The Types of Term Life Insurance
Term life insurance is the simplest form of life insurance. Your choose the coverage needed to protect your loved ones. The premium is based on the amount of coverage you choose, your age, and your health status.
There are 3 types of term life insurance sold
- Level Term
- Decreasing Term
- Annual Renewable Term (ART)
Level Term Life Insurance
This is the most popular term product sold. The death benefit and premium are level for the term period chosen. Term periods can be anywhere from 10-30 years depending on your age.
Most level term comes with a convertibility clause which allows you to convert your policy to a permanent life policy without any medical questions asked. This is a great option to have if your health changes during your term life policy and you are unable to qualify for life insurance again.
Decreasing Term Life Insurance
This type of term life insurance is usually associated with mortgage protection insurance. Decreasing term life is designed to have a decreasing death benefit, while the premium remains the same.
These policies are designed to cover a loan or other financial obligation. The policy’s death benefit depreciates usually to coincide with a decrease in your loans value, such as a mortgage.
These policies require no exams and are a good fit for smokers or consumers with a high risk job or hobby. The major downside is that the premium remains level while the benefit decreases. Essentially you are paying more for less coverage as the policy gets older.
Annual Renewable Term (ART)
Annual renewable term life insurance is the exact opposite of decreasing term life. The death benefit on an ART is level while the premiums increase slightly each year.
These policies are designed for the premiums to start out low, but increase over time. Unfortunately the older you get the more the premiums increase. This usually means the premiums are far to high to keep the policy when you most likely will need it the most.
They Types of Permanent Life Insurance
Permanent life insurance, unlike term which expires as some point, offers coverage for the lifetime of the insured. Permanent life insurance also offers a cash value component which can be withdrawn, usually tax-free, if any need were to arise.
The types of permanent life insurance:
- Whole Life
- Final Expense
- Graded Benefit Whole Life
- Guaranteed Issue Life
- Traditional Universal Life
- Guaranteed Universal Life
- Indexed Universal Life
- Variable Life
- No Exam Life Insurance
- Survivorship Universal Life
Whole life insurance is the first type of product that most consumers think of when you mention permanent life insurance. And for good reason, it’s a benchmark life insurance product and has been marketed heavily by all life insurance companies.
Whole life is a permanent product with guaranteed premiums, coverage that last forever (as long as premiums are paid), and has a guaranteed cash value component. The cash value grows tax-deferred and can be borrowed from if a need arises.
Some whole life policies also offer dividends, which can be used to purchase extra life insurance. These types of policies are called “participating whole life”.
Final expense is often referred to as burial insurance and is available to seniors age 50-85 years of age. Final expense policies are whole life policies with guaranteed premiums and death benefit. They do also build up cash value than can be borrowed against. Death benefits range from $5,000 to $50,000 and most do not require an exam.
Final expense applications are simplified issue, which means they do accept some consumers who have had health problems but nothing significant in the last 3 years. These policies are used to pay burial expenses and any small debts left behind.
Graded benefit life insurance is a whole life policy for seniors similar to final expense in that consumers with health issues can qualify. Seniors age 50-85 can qualify with death benefits ranging from $2,500-$25,000.
The death benefit on these policies are graded for the first 2 years, meaning only a portion is paid if death is by an illness. This is an example of how a claim would look with graded benefit life insurance.
$20,000 Policy-55 year old Male
- If death occurs the first year from illness, 20% of death benefit (or $4,000) is paid to your loved ones.
- If death occurs the 2nd year from illness, 50% of death benefit (or $10,000) is paid to your beneficiaries
After 2nd year or if death is by accident at anytime, the full death benefit is paid.
Guaranteed issue life insurance is just like it sounds, guaranteed issue. All applicants are approved no matter your health or background history. No one can be denied. That sounds great, but wait there is a provision you should know about.
- The first 2 years if death is by illness, then premiums paid in plus interest is paid to your beneficiaries
- After the 2nd year or if death is by accident at anytime, the benefit is paid in full.
Guaranteed issue life insurance is a whole life policy with guaranteed premiums and cash value build up. Although these policies are designed for death protection more than cash value accumulation.
Universal life insurance is considered to be a hybrid of term life insurance and whole life insurance. Often referred to as adjustable life insurance, because of its flexible premium and death benefit. These policies are designed to give you a lower cost premium than whole life, death benefit coverage for your entire life, and a cash value component.
Universal life policies come with a minimum guaranteed and a non-guaranteed interest. The non guaranteed interest earned in these policies is declared each year on your anniversary date and is based on the life insurance companies yearly financials.
The major difference between universal life and whole life is the premiums are not guaranteed unless specified in your contract. Cost of insurance rises like it does on annual renewable term life, but the cash value build up is suppose to offset the increases.
Unfortunately these increases are not offset by the cash value sometimes, which leads to the premium increasing later down the road. It’s important if you own a policy like this without a guaranteed premium clause to get annual in force illustrations quoted to make sure the cash value is keeping up with the cost of insurance increases.
Guaranteed universal life is similar to a traditional universal life policy except the premium is guaranteed for the life of the policy. These policies do build up some cash value, but are geared more towards death protection. If you are looking for a low-cost permanent life insurance policy with a guaranteed premium, this will fit you perfectly.
Indexed universal life has gained popularity the last 5 years because of its unique interest crediting strategy. Instead of the interest being declared annually and a fixed rate, it’s invested into one or more market indexes, such as S&P 500 or Nasdaq.
These policies come with a floor interest rate, usually 0%, which means you cannot lose if the index you are invested in returns are in the negative. Along with a floor, you are capped at what the most interest you can make annually is. The caps are usually around 10% which means the most interest you can earn in a year is 10%, anything over that the insurance company keeps.
The premiums are not guaranteed and contingent on the cash value accumulating to offset the rising cost of insurance each year. Indexed universal life can be a great place to accumulate savings tax-deferred with an option to withdraw funds tax-free at retirement.
Variable life insurance is very similar to indexed universal life in that you are allowed an option to earn a higher interest rate than traditional universal life. With variable life you can be invested in sub-accounts which mirror mutual funds.
Variable life does not come with a floor or cap, which means you feel all the highs and lows of the investment. These policies are more riskier than the other permanent life policies. Since the premiums are not guaranteed, it’s important to review your policy often to make sure the cash value is performing to expectations and illustrations shown at the time of the sale.
No exam life insurance is the hottest life insurance product on the market today. Not having to take an exam to qualify for a life insurance policy is always a top choice for most consumers.
These policies are tradition term and permanent life insurance, you just don’t have to take an exam if you are in relatively good health. The maximum death benefit that you can apply for without having an exam is usually $250,000 but some companies have increased that to $1 million.
By no means are these policies guaranteed issue. Even though no exam is required, the insurance company will underwrite the policies and you will have to qualify for coverage. They will also pull records such as:
- Medical Information Bureau
- Script Check
- Background Check
- Sometimes Physician Records
Survivorship Universal Life
Survivorship universal life also referred to as a “Second-to-Die” life insurance policy covers the lives of 2 people, usually husband and wife. These policies pay the death benefit on the second insured’s death. They are used mainly for estate planning, charitable giving, or to leave a legacy to kids or grandchildren.
These policies come with a guaranteed premium in most cases, since the death benefit is what is most important, however some are designed similar to the indexed universal and variable life products.
There you have all the different types of term life insurance and permanent life insurance. While their are some similarities, none are exactly the same. With this said it’s important to work with an experienced life insurance agent who can explain in detail how each type functions. This will help ensure you find the life insurance policy that best fits your needs and the needs of your loved ones. If you have any questions, comments, or would like to get a quote, please give us a call.