Life insurance is a financial product that provides financial protection to the policyholder’s loved ones in the event of their death. It helps to ensure that the policyholder’s family is financially secure and able to maintain their standard of living even in the absence of the policyholder’s income. There are various types of life insurance available, each with its own set of benefits and drawbacks. It is important to carefully consider your individual circumstances and needs before choosing a life insurance policy.
Main Insurance Categories
There are two main categories of life insurance: term life insurance and permanent life insurance.
Term life insurance
Term life insurance is a type of life insurance that provides coverage for a specific period of time, or “term.” If the policyholder dies during the term of the policy, the beneficiary will receive a death benefit. If the policyholder does not die during the term, the policy will expire and there will be no payout. Term life insurance is generally the most affordable type of life insurance, but it does not offer any cash value or other long-term benefits.
Permanent life insurance
Permanent life insurance provides coverage for the policyholder’s entire life. In addition to the death benefit, permanent life insurance also includes a savings component that accumulates cash value over time. This cash value can be borrowed against or withdrawn, while you are still alive, subject to certain conditions. Permanent life insurance is typically more expensive than term life insurance, but it offers more long-term benefits.
Common Types of Life Insurance
Term life insurance
Term life insurance, as mentioned above, provides coverage for a specific period of time. It is generally the most affordable type of life insurance and is a good option for those who need temporary coverage, such as to cover a mortgage or to provide for a child’s education.
Whole life insurance
Whole life insurance, also known as traditional life insurance, provides coverage for the policyholder’s entire life. It includes a savings component that accumulates cash value over time, it accrues interest at a fixed rate and on a tax-deferred basis. The policy guarantees that the premium will not increase. Whole life insurance is generally more expensive than term life insurance, but it offers more long-term benefits.
Universal life insurance
Universal life insurance (UL) offers policyholders the flexibility to adjust their premiums and death benefits within certain limits. Premiums for universal life insurance consist of two components: a cost of insurance (COI) amount and a saving component, known as the cash value. The COI amount covers the cost of providing insurance coverage, while the cash value represents the policy’s saving component. Any excess premiums paid by the policyholder are credited to the cash value, which can be used to pay premiums, borrow against, or withdraw, subject to certain conditions. Universal life insurance offers more flexibility than whole life insurance and may be a good option for those who want to have the ability to adjust their coverage as their needs change.
Indexed universal life insurance
Indexed universal life insurance is a type of permanent life insurance that combines features of universal life insurance with the potential for cash value growth based on the performance of a stock market index, such as the S&P 500. This type of life insurance offers the potential for cash value growth, as well as the flexibility to adjust premiums and death benefits.
Variable life insurance
Variable life insurance is a type of permanent life insurance that offers the potential for cash value growth through investment in a variety of subaccounts, similar to mutual funds. The cash value and death benefit of a variable life insurance policy can fluctuate based on the performance of the subaccounts.
Variable universal life insurance
Variable universal life insurance is a type of permanent life insurance that combines the flexibility of universal life insurance with the potential for cash value growth through investment in a variety of subaccounts. Like variable life insurance, the premiums are adjustable and the cash value and death benefit of a variable universal life insurance policy can fluctuate based on the performance of the subaccounts.
Group life insurance
Guaranteed issue life insurance is a type of life insurance that does not require a medical examination or any questions about the policyholder’s health or lifestyle. It is guaranteed to be issued to anyone who is within the eligible age range, which is typically 40 to 85. However, this type of life insurance is generally more expensive than other types and has limited death benefits. Coverage amounts are typically low, and policies often have graded death benefits, meaning that if the policyholder dies within the first few years of having the policy, their beneficiaries may receive only a partial payout.
People often choose guaranteed issue life insurance if they have been turned down for coverage due to health issues but want to provide financial protection for their loved ones, particularly to cover final expenses such as funeral costs.
Other Types of Life Insurance
Accidental death and dismemberment insurance
Accidental death and dismemberment insurance (AD&D) provides a death benefit in the event of the policyholder’s accidental death, as well as additional benefits for specific injuries sustained in an accident such as loss of limbs, loss of sight or hearing. AD&D insurance is generally more affordable than traditional life insurance.
Mortgage life insurance
Mortgage life insurance is specifically designed to pay off a mortgage which is paid out to the lender in the event of the policyholder’s death. It is generally less expensive than traditional life insurance and is a good option for those who want to ensure that their mortgage will be paid off in the event of their death.
Joint life insurance
Joint life insurance is a type of life insurance that covers two people, typically a married couple, under one policy. There are two main types of joint life insurance: first-to-die and second-to-die.
First-to-die joint life insurance pays out a death benefit to the surviving policyholder when the first policyholder dies. The policy then expires and does not continue to cover the second person. These policies are rare as the demand for them is low.
Second-to-die joint life insurance pays out a death benefit to the beneficiaries after both policyholders have died. These policies are often used to cover estate taxes or the care of a dependent after both policyholders have passed away. Second-to-die joint life insurance is generally less expensive than two separate individual life insurance policies and can be a good option for those who want to provide financial protection for their loved ones after both policyholders have passed away.
Final expense insurance
Final expense insurance, also known as burial insurance, is a type of life insurance that is specifically designed to cover the policyholder’s end-of-life expenses, such as funeral and burial costs.
Types of Life Insurance by Underwriting
Underwriting is the process of evaluating an applicant’s risk for the purpose of determining their eligibility for insurance coverage and the premiums that will be charged. There are three main types of life insurance by underwriting: fully underwritten life insurance, simplified issue life insurance, and guaranteed issue life insurance.
Fully underwritten life insurance
Fully underwritten life insurance is a type of life insurance that requires a medical examination and a detailed review of the policyholder’s medical history and lifestyle to determine their eligibility for coverage. The premiums for fully underwritten life insurance are based on the policyholder’s individual risk profile. This type of life insurance typically offers the most comprehensive coverage and the most competitive premiums, but it may not be suitable for those with health issues.
Simplified issue life insurance
Simplified issue life insurance is a type of life insurance that does not require a medical examination to qualify for coverage. Instead, policyholders answer a series of questions about their medical history and lifestyle to determine their eligibility for coverage. Simplified issue life insurance is generally more expensive than fully underwritten life insurance, but it is a good option for those who may have trouble qualifying for coverage due to health issues.
Guaranteed issue life insurance
Guaranteed issue life insurance is a type of life insurance that does not require a medical examination or any questions about the policyholder’s health or lifestyle. It is guaranteed to be issued to anyone who applies, regardless of their health status. Guaranteed issue life insurance is generally the most expensive type of life insurance and typically has a limited death benefit.
Which life insurance is best for you?
The type of life insurance that is best for you will depend on your individual circumstances and needs. Some factors to consider when choosing a life insurance policy include your age, health, budget, and the length of coverage you need. It is important to carefully research and compare different types of life insurance before making a decision. It may also be helpful to consult with a financial advisor or insurance professional to determine the best option for your individual situation.
