Understanding the Different Types of Life Insurance

Primarily, there are two different types of life insurance you need to know about.

Term life Insurance

Term Life pays a death benefit to your designated beneficiary or beneficiaries if your death occurs within a specified period known as the “term period”. During the term, your premiums will also be level. The term period can be for:

1 year – Annual renewable term
10 year
15 year
20 year
30 year
Even 25, 35, or 40 years

The premiums for term life insurance are lower at issue than premiums you would pay for otherwise comparable permanent life insurance. Over time, however, the premiums for term life insurance tend to increase and may eventually exceed permanent life insurance premium on a policy you may have purchased at the same time.

If you are still alive after the term period expires, the term life insurance policy will either dramatically increase in cost or expire all together. If you still need life insurance, you will have to then try to purchase a new policy at an older age and most likely not as good health.

Permanent Life Insurance

Permanent Life Insurance is designed to last for your entire life as long as premiums are paid. In addition to providing a death benefit, it offers a means to ready cash through its cash value. The availability of cash value can be an important reason to purchase permanent life insurance because this is a benefit that can be used during your lifetime. A life insurance policy’s cash value can help you pay for college expenses, partially fund the purchase of your home, or even provide you with supplemental income for a more secure retirement.

Types of permanent life insurance include:

Whole Life Insurance
Universal Life Insurance
Variable Life Insurance

Term Life Insurance – Definitions – Convertible & Renewable

Term life is the simplest form of life insurance. It provides a death benefit during a specified term period…

Whole Life Insurance – Definitions – Pros & Cons

Whole life insurance is the only type of life insurance containing the guarantee that it will be in force when …

What is Universal Life Insurance? Unlike Whole Life Insurance Policies —for which an actuary determines the guaranteed premium based on anticipated mortality experience, expected interest earnings from invested premiums, and an estimate of future insurer expenses— Universal Life Policies offer an unbundled approach.

Universal Life Insurance – Increased Flexibility

Unlike Whole Life Insurance Policies, Universal Life Policies offer an unbundled approach… for increased flexibility…

Term Life Insurance (Temporary)

Annually Renewable Term (ART) – Least expensive term life policy. Premium increases every year as you get older. Coverage stays the same. ART is usually purchased when the coverage is only needed for a few years.
Level Term – There is a 5, 10, 15, 20, 25, 30, 35, & 40 year “Level Term Period”. The premium and death benefit remain the same for the duration of the level term period. The coverage will either revert to an ART (premiums increase every year as you get older) or the policy will expire after the level term period ends. Level term is usually purchased when the need for coverage is long term but not a lifetime.
Decreasing Term – The amount of coverage decreases over time BUT the premiums remain the same. Decreasing term is usually purchased to cover a mortgage.

Advantage: Least expensive premiums for the most coverage

Disadvantage: Coverage may expire before you die.

TERM LIFE INSURANCE REVIEWS & SAMPLE QUOTES

10, 15, 20, and 30 Year Term Life Insurance

GROUP LIFE INSURANCE (TERM)

Term life insurance offered through your employer or a club or association you are a part of. Premiums are cheaper than other forms or term life insurance. The coverage amount is a multiple of your salary. For example 1x or 2x salary.

Advantage:

Easy to get. Does not require any medical exam.

Disadvantage:

Cost increase over time plus you will lose the coverage if you leave your employer or association.

MORTGAGE LIFE INSURANCE (TERM)

Mortgage life insurance is decreasing term life insurance. The death benefit decreases over time but premium remains the same. The bank or mortgage company is paid the death benefit directly, NOT your beneficiary.

Advantage:

Guaranteed issue. No underwriting required.

Disadvantage:

Expensive compared to level term plus you pay the same premiums for less coverage over time.

CREDIT LIFE INSURANCE (TERM)

Decreasing term life insurance sold through banks or credit unions that would pay an outstanding loan balance owed when you die. The lending institution is paid the death benefit directly, NOT your beneficiary.

Advantage:

Guaranteed issue. No underwriting required.

Disadvantage:

Expensive compared to level term plus you pay the same premiums for less coverage over time.

Whole Life Insurance (Permanent)

Whole life insurance has a guaranteed premium (will not increase), death benefit, and cash value account. The policy will last your whole life as long as you continue to make your premium payments.

Advantage:

Lifetime coverage plus it builds cash value. Provides the most guarantees.

Disadvantage:

The most expensive form of life insurance. Can not miss a premium or your policy will lapse.

Universal Life Insurance (Permanent)

There are multiple guaranteed universal life insurance options to choose from that may make sense for you and your family. Each one has it’s pros and cons but based on your needs one of these policies may be the answer you looking for.

GUARANTEED UNIVERSAL LIFE (GUL)

The least expensive form of permanent life insurance. The premiums and death benefit are guaranteed to a certain age. For example To Age 95, To Age 100 or To Age 121. There is little or no cash value in a GUL. A “no lapse guarantee” may allow you to miss premium payments without the policy lapsing.

Advantage:

Least expensive form of permanent life insurance.

Disadvantage:

Even with a “no lapse guarantee” the policy will lapse if you miss multiple premium payments because there is little or no cash value to cover the missed payment.

GUARANTEED UNIVERSAL LIFE REVIEWS & SAMPLE QUOTES

Customize Your Policy’s Expiration Date to Age 95, Age 100 or even Age 121

Maximum Issue Age is 80. You can not purchase this policy, if you are over 80 years of age.

INDEXED UNIVERSAL LIFE (PERMANENT)

The underlying investment of the policy’s cash value account is tied to a stock market index like the S&P 500, A formula determines how gains are credited and is written in the policy. For example, if the policy formula states an 80% participation rate and the S&P gains 10%, the policy will realize an 8% rate of return. The formula puts a cap on gains. For example, if the S&P gains 15% and the stated cap is 10% the policy cash value is only credited 10%. The formula also puts a floor on losses as well. If the S&P 500 has a loss, the policy’s cash value will not decrease.

Advantage:

Lifetime coverage with cash value that can see considerable gains when the market does well but does not lose value when the market suffers losses. Adjustable death benefit and premium schedule as your needs change. You can skip premium payments as long as there is sufficient cash value to cover the cost.

Disadvantage:

Is complex and will require extra time to track the policy performance.

VARIABLE UNIVERSAL LIFE INSURANCE (PERMANENT)

The policy cash value is invested in separate accounts that are similar to mutual funds. These separate accounts can be stock and/or bond funds. Premiums can be skipped as long as there is sufficient cash value to cover the cost. If the separate account has gains, the policy death benefit will increase. The premiums may need to be increased to maintain the death benefit and cash value if the separate account has losses.

Advantage:

Provides an increased value to the owner or beneficiary because of the increasing death benefit and the potential high rate-of-return earned separate accounts..

Disadvantage:

Is complex and will require extra time to track the policy performance. Premiums may increase to maintain policy if the separate accounts incur losses.

JOINT LIFE INSURANCE (PERMANENT)

First To Die – Policy covers 2 lives and pays out after the first person dies. The premiums are payable until the first person dies.

Second To Die – Policy covers 2 lives and pays out after the second person dies. Premiums are payable until the second person dies.

Advantage:

Cheaper than buying 2 separate policies.

Disadvantage:

Simultaneous death benefits no one.

ACCIDENTAL DEATH & DISMEMBERMENT INSURANCE

Covers you if you die in an accident. Also pays out for the loss of limbs, as well as the loss of your sight or hearing.

Advantage:

Very inexpensive plus easy to qualify for.

Disadvantage:

Does not pay if death is caused by something other than an accident.

Types of Life Insurance Underwriting

FULLY UNDERWRITTEN LIFE INSURANCE (TERM & PERMANENT)

Fully underwritten life insurance will require a completed application plus a medical exam and an Attending Physician’s Statement, (APS). In addition, the life insurance company will check the Motor Vehicle Report (MVR), the Medical Information Bureau (MIB), the Rx database, plus your credit and criminal history.

Advantage:

Less expensive premiums if you are healthy and have clean records.

Disadvantage:

Lots of requirements and it can take upwards of 6-8 weeks to get approved.

SIMPLIFIED ISSUE LIFE INSURANCE (TERM & PERMANENT)

Simplified issue life insurance will require a completed application but WILL NOT require a medical exam or APS. The life insurance company will check the MVR, MIB, the Rx database, plus your credit and criminal history.

Advantage:

No medical exam required. Approval could be instant or as little as a few days.

Disadvantage:

Prices are higher versus fully underwritten life insurance.

GUARANTEED ISSUE LIFE INSURANCE (TERM & PERMANENT)

Guaranteed issue life insurance requires no underwriting at all. You can not be turned down for any reason. Approval is instant.

Advantage:

Instant approval. You can not be turned down.

Disadvantage:

Very expensive. Policy only pays premium plus interest if you die in the first two years. Full death benefit amount is paid after the second policy anniversary.