5 Types of Life Insurance, how they work and how to buy them.
The five main types of policies you may encounter when purchasing a life insurance policy include term life insurance, whole life insurance, universal life insurance, variable life insurance, and term life insurance. Funeral or final expenses life insurance.
There are many types of life insurance policies on the market, but they all fall into two main categories:
term life insurance and permanent life insurance. Term insurance - the most common type of life insurance - lasts for a certain period of time, while permanent insurance lasts your entire life.
The right policy for you will depend on your individual circumstances, your unique needs, the level of coverage you need, and how much you want to pay for it. This guide covers the most common types of life insurance policies on the market, including information on how they work, their pros and cons, how long they last, and who they're best suited for.
Lifetime insurance
Whole life insurance is the most popular type of permanent life insurance due to its simplicity and lifetime term. Its cash value - a tax-deferred savings account similar to an investment - earns interest at a fixed rate.
How it works:
Whole life insurance has a guaranteed death benefit and cash value that earns interest over time. A portion of your premium is allocated to policy maintenance costs and the remainder is allocated to a cash value account.
Professionally:
Cash value and lifetime insurance — the cash value component may include endowments or estate plans. And because this coverage lasts your entire life, it can help support long-term dependents such as children with disabilities.
Against:
Cost and complexity — a whole life policy can be 5 to 15 times more expensive than a term life policy for the same death benefit. The cash value component makes whole life more complex than term life because of fees, taxes, interest, and other stipulations.
Best for:
High-net-worth individuals who need to diversify their investment portfolio and people with dependents who may need long-term care.
Universal life insurance
Universal life insurance is a flexible permanent life insurance policy that lets you decrease — or increase — how much you pay toward premiums. If you decrease how much you spend on premiums, the difference is withdrawn from your policy's cash value.
A universal life insurance policy can be a good fit if you're looking for some flexibility in your life insurance — and you can afford that flexibility; a universal policy is more expensive and complicated than standard whole.
How it works:
Universal life insurance allows you to adjust your premiums and death benefit depending on your needs. If, after some time, you decide to stop paying or lower your monthly premiums, you can use the cash value to cover your premiums.
Pro:
Flexibility — you can adjust your premiums based on your financial needs.
Con:
Investment risk — interest earned from the cash value is based on market performance, so it's not the best option to save money for the future.
Best for:
High earners who are trying to build a nest egg without entering a higher income bracket.
Variable life insurance
Variable life insurance is a type of permanent coverage that allows you to invest the money from your cash value in various funds offered by the insurance company, including mutual funds. While variable life insurance comes with a guaranteed minimum death benefit, the cash value is not guaranteed and will depend on market conditions. You may earn more in return than with a fixed-rate, whole life policy, but you as the policyholder take on the investment risk if the fund underperforms.
How it works:
Variable life provides the opportunity to invest the cash value in various funds offered by the insurance company, including mutual funds. Investment performance will reflect broader market trends.
Pro:
Gains potential — variable policies may earn more interest than traditional whole life.
Con:
Investment risk — potential for losing money if the funds you picked underperform.
Best for:
High earners looking for permanent coverage options to diversify their investment portfolio.
The best way to decide between term or whole is to talk with a financial advisor and work with an independent broker to find the right policy for your specific needs. At Policy genius, our experts are licensed in all 50 states and can walk you through the entire life insurance buying process while offering transparent, unbiased advice.
Final expense insurance
Final expense insurance, also known as burial insurance, is a type of life insurance designed to pay a small death benefit to your family to help cover end-of-life expenses. Unlike traditional life insurance, which is meant to replace decades' worth of income, burial insurance is usually suited to older adults who want a smaller policy to cover their funeral costs. Because of the high rates and lower premiums, end-of-life insurance is often not as beneficial as term life insurance.
How it works:
Unlike most traditional policies that require a physical exam, all you need to do is answer a few questions to qualify for final cost coverage. And there is little or no waiting time for coverage.
Professionally:
Guaranteed coverage – easy access to a small allowance to cover end-of-life expenses, including medical expenses, burial or cremation services and coffins or urns.
Against:
Cost — expensive premium for lower coverage
Best for:
People who find it difficult to qualify for traditional insurance, such as the elderly and those with serious health conditions.
What type of life insurance is right for you?
Term life insurance policies are often the best solution for those who need affordable life insurance for a specific period of their life. Permanent life insurance policies, including whole, universal, and variable life insurance, are best for people who can pay more and want life insurance that never expires.
End-of-life insurance can be an option for those unable to insure themselves due to age or poor health, or for older consumers who don't want to burden their families with future costs. burial.
You should always speak with an independent licensed broker, such as Policy genius or a financial advisor to determine the best policy and insurance company for you. They can help you weigh the pros and cons of each type of insurance and buy the right one for your needs.
Ten other popular types of life insurance
Life insurance without medical examination
No physical examination is a type of life insurance that does not require a physical examination to be approved. Instead, non-drug policies use previous medical records and other information about you to determine your premiums.
These types of policies also come with a shorter waiting period, which is the gap between when you start the application process and when your policy goes into effect. If you don't have 0 to mild medical conditions and don't have a family history of high-risk conditions like heart disease, especially if you're young, you may be eligible for no medication.
Professionally:
Save time - no-med provides faster access to life insurance without the need for a physical exam.
Against:
Those who are elderly or in poor health may not be eligible.
Best for:
Anyone in good health
Short term life insurance
A short-term life insurance policy offers some coverage while you wait for a longer-term policy. Policies last a year or less and protect you if you can't get a reasonable premium due to an existing medical condition or waiting for the insurance company to decide on your claim.
Short-term policies have their own limitations, such as premium increases and maximum coverage, but can provide temporary protection. The two most common types of policies are annual renewable life insurance and term life insurance.
Professionally:
Convenience - short term can provide temporary coverage.
Against:
Term and cost — may last for only a few months and/or premiums escalate.
Best for:
People are waiting for long-term policy approval.
Simplify Life Insurance
Simplified whole life insurance, also known as simplified issue life insurance, provides a small amount of permanent life coverage to people who do not qualify for other policies and do not claim physical examination. Instead, you answer some questions about your health. The shorter application process gives you near-instant coverage, but because the health assessment isn't as thorough, insurers charge higher premiums for lower coverage amounts. However, policies that simplify matters can help the elderly or those with certain pre-existing conditions get coverage to pay the ultimate costs.
Professionally:
Convenience – the simplification provides a small cover of the final costs without the need to carry out a medical examination.
Against:
Cost — higher premium for lower coverage amount. People over a certain age or with serious underlying medical conditions may not be eligible.
Best for:
Elderly people with no serious medical problems
Life insurance issuer
Guaranteed release life insurance belongs to a type of policy known as funeral insurance. This is the most suitable permanent coverage for people between the ages of 45 and 80 and who cannot qualify for a standard life insurance policy due to a serious medical condition or terminal illness. last. App acceptance is virtually guaranteed.
Unlike term or whole life insurance, applying for guaranteed life insurance doesn't involve health questions or a physical exam. It has a small death benefit, intended to help your family cover funeral costs or medical bills.
Professionally:
Almost certain approval – the matter is guaranteed to provide access to a small death benefit to cover final costs.
Against:
Cost — high premium for relatively low coverage
Best for:
Elderly or terminally ill people
Mortgage Protection Insurance
Mortgage Protection Insurance, also known as MPI, is designed to pay off your remaining mortgage upon your death. Unlike other types of policies, MPI only pays out the death benefit to your mortgage lender, making it a much more limited option than a traditional life insurance policy. In MPI, the beneficiary is the mortgage company or lender, rather than your family, and the death benefit decreases over time as you make mortgage payments, similar to a reduction.
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