Just about every person who starts to think about buying life insurance and the types of life insurance available generally asks the two following questions:
“What type of life insurance is available?”
“Which is the best life insurance to buy?”
The first question is easy to answer, so let’s look at all the available types of life insurance.
Types of Life Insurance
Life insurance basically comes in two types:
- Term Life Insurance
- Permanent Life Insurance
Term Life Insurance
Many people are familiar with term insurance but don’t realize that it comes in many formats with different names. So, let’s look at these types of life insurance in more detail.
Term life insurance is the most basic form of policy available and also the most affordable as it covers you for death benefits only. Although term provides coverage for life, you buy it in periods of time known as terms such as for 10, 20, 30 years. It can also be bought for an age specific time such as age 65.
You can also buy specialty term products such as a 1 year term renewable or a 5 year term which is ideal for business or SSL loans.
Basic Term Life Insurance Policies
Term insurance comes in three types of policies:
- Level Term – This means that the premiums you pay for a specific death penalty remain the same through the life of the term. This is the most common form of term policy sold today. It’s ideal for many life insurance situations such as income replacement and debt coverage.
- Decreasing Term – This policy sees a periodic reduction in your death benefits at various time increments throughout the term. Your premiums remain the same. This policy is ideal if you need life insurance for a mortgage or see a decreasing need for higher amounts of life insurance down the road.
- Increasing term – This simply means that both your death benefits and premiums increase at various time increments throughout the life of the term. This type of policy is less common but can be ideal for a young family starting out on a tight budget.
Other Specialty Term Policies
You have possibly seen these types of life insurance policies advertised as the following:
- No-Medical Exam Life Insurance
- Guaranteed Issue Life Insurance
- Funeral and Burial /Final Expense Life Insurance
- Graded Death Benefits
The key features of these types of life insurance policies are that they do not require a medical exam and provide coverage for lesser amounts of life insurance. Although convenient to buy, we don’t recommend them simply just for their convenience.
Many of these policies will cover you for life or are age specific such age 85 for example, so make sure you ask about how long they are in force.
These types of life insurance policies cost more and have less coverage because the insurer is taking a much higher risk to cover you because they have less medical information about you.
Some companies also have a graded death benefit waiting period where you must remain alive for a certain period of time such as 2 or 3 years before the policy will pay out benefits to your beneficiaries.
If you are young and healthy, we recommend that you buy a standard term policy with a medical exam because you will save a lot more money.
But, if you have serious health issues, need coverage immediately or only need limited coverage for final expenses, or you are elderly, then one of these types of policies might be your better option.
Permanent Life Insurance
These types of life insurance policies are different than term policies. They provide death benefits just like term but also have an additional feature as they also provide a cash value accumulation feature which grows throughout the life of the policy.
Most policies guarantee a minimum amount of interest so you might not gain as much during years when the market is prosperous, but you also don’t lose as much when the market tanks.
Another feature is that these types of life insurance policies cover you for your entire life and don’t have to be renewed.
The final feature which they showcase is that you can also borrow against the cash value and have the option to either repay the loan or chose not to do so but simply choose to opt for your death benefits to be reduced instead.
Because of the cash value accumulation feature, these types of life insurance policies tend to considerably more expensive than term life insurance policies because your premiums go towards three separate areas:
- Death benefits
- Cash Value Accumulation
- Administration Costs
There are two basic types of permanent policies which are sold in variety of hybrid formats by different insurers, but the two basic types include:
- Whole Life
- Universal Life
Whole life is somewhat more rigid as premiums and death benefits remain the same. Also, the insurer chooses where and how the cash value accumulation portion is invested.
Whole life policies are offered as “Participating Whole Life” which does offer you an option about the investment portion, and “Non Participating Whole Life” which does not offer any options.
Whole life policies are best used by those who aren’t comfortable in managing their money and prefer others to do so on their behalf.
Universal life insurance is similar to whole life but is more flexible as you can buy policies which allow you to alter your death benefits and your premiums during the life of the policy. They also allow you to choose which investment vehicle the insurer uses to invest the cash value accumulation portion.
Some of the hybrid varieties of these types of life insurance policies which you might see advertised include:
- Indexed Universal Life
- Variable Universal Life (Must be sold by a licensed securities agent only)
Most permanent policies are best purchased by those who are high income earners, or have a significant estate, or where you have maxed out your 401(k) and other tax breaks.
Which Life Insurance Policy is Best
There’s no easy answer for this because the needs for each person and family is different.
Before you decide among the types of life insurance, we highly recommend that you take the time to learn more by speaking to an independent agent such as those here at JRC Insurance Group because we can help you decide and explain what you need to know.
This post is written by Chris Huntley, a licensed life insurance agent in 48 states. He is director of marketing at JRC Insurance Group and blogs about life insurance at InsuranceBlogByChris.com.
