According to a recent survey, about 37 percent of Americans do not own any life insurance policies.
One of the main reasons for this is that they think it’s either too expensive or do not understand it.
There are many types of life insurance policies. Trying to figure out which types of life insurance best suit your needs can be a bit confusing.
Unless you are in the life insurance business trying to understanding life insurance can be confusing. Also, throw in all the different types of life insurance policies, and it can become more than overwhelming.
The great thing about life insurance is that there are several plans, and each one exists to provide different benefits to help make certain financial goals are met.
There is life insurance coverage to cover family needs, short term needs, long term needs, burial needs, as well as even business needs.
Understanding the different types of life insurance policies can help bring peace of mind that life insurance offers. It can also make the purchasing process much less overwhelming.
In this article, we will first discuss the two primary forms of life insurance known as temporary and permanent. From there, we will break down the different types of life policies that fall under these two primary forms of life insurance coverage.
- Temporary & Permanent Life Insurance Policies
- Types of Available Life Insurance Policies
- Term Life Insurance
- Return of Premium Term Life Insurance (ROP)
- No Medical Exam Term Life Insurance
- Guaranteed Universal Life Insurance (GUL)
- Indexed Universal Life Insurance (IUL)
- Variable Universal Life Insurance (VUL)
- Whole Life Insurance (WL)
- Final Expense Life Insurance (FE)
- Guaranteed Issue Whole Life Insurance (GI)
- Accidental Death & Dismemberment Insurance (AD&D)
- Long-Term Care Insurance (LTC)
- How to choose a Great Life Insurance Company
- How Much Life Insurance Do You Need?
- Term or Permanent Life Insurance?
- Common Life Insurance Terms and Their Meanings
- What’s the Best Type of Life Insurance Policy for you?
Temporary & Permanent Life Insurance Policies
Life insurance in itself is available in two forms. These forms are known as temporary and permanent.
Temporary – The life insurance coverage will terminate at some point.
Permanent – The life insurance coverage will remain in effect forever.
The first step to choosing a life insurance policy is to determine whether your coverage needs are going to be temporary or permanent.
This in itself this can be a tough decision as there are several life factors to consider and unfortunately we cannot predict the future.
If we could, knowing which coverage to purchase would be very simple.
Since every individual will have different coverage needs choosing the best type of life insurance policy will depend on each individual person.
However, a life insurance agency that specializes in all these different types of life insurance policies, we can help make this decision a much easier process.
As we dive deeper into this article and begin discussing the different types of life insurance policies, we will provide examples of how each coverage type can be beneficial in making sure insurance and financial goals are met.
Types of Available Life Insurance Policies
The below list are all the available life insurance policies that will be discussed in this article. Quickly jump to any life insurance policy by clicking on the blue links below.
Types of Term Life Insurance Policies
Types of Permanent Life Insurance Policies
- Guaranteed Universal Life Insurance (GUL)
- Indexed Universal Life Insurance (IUL)
- Variable Universal Life Insurance (VUL)
- Whole Life Insurance
- Final Expense Whole Life Insurance
- Guaranteed Acceptance Whole Life Insurance
Types of Supplemental Life Insurance Policies
Additional Helpful Life Insurance Information
Term Life Insurance
Term life insurance is the most popular of all available life insurance policies and most likely you may have heard of it.
One of the main reasons for this is because of its affordability and the higher amounts of coverage you can get for the price compared to all other types of life insurance policies.
Term insurance provides 100% death benefit protection for a set period of time. For this reason, term life insurance falls under the “temporary” category of life insurance policies.
Typical policies come in term lengths otherwise know as “fixed” premium contracts of 10, 15, 20, 25 or 30 years. Some companies even offer 1, 5 or even 35-year contract lengths as well.
For example, let’s say you purchase a 10-year term life insurance policy with a coverage amount of $100,000. After underwriting has approved you for a policy, your rates are guaranteed to remain the same price for the next 10 years.
When a term life insurance policy ends, most companies will allow one of three options.
These options generally are:
- Continue paying on the expired contract, which is often at a very expensive rate.
- Exercise your conversion option if available. This option allows you to switch to a permanent life insurance policy without evidence of insurability.
- Renew your life insurance contract by going through new underwriting and providing evidence of insurability.
There is also the option to do nothing and just let the term life insurance expire if you no longer have further life insurance needs.
One important thing to remember when considering term life insurance is that it does not gain any cash value. Once the contract is terminated that is it.
Also, although term insurance is the most affordable of all types of life insurance policies, it will be more expensive when the contract is over. Even if you are healthy a can provide evidence of insurability.
The reason for this is due to age. Premiums are calculated on several underwriting factors but two main ones are health and age.
Term life insurance can provide funds to help pay…
- Income due to the loss of a spouse
- Mortgage payments or payoff mortgage balance
- Children’s college education
- Credit debts
- Medical debts
- Estate taxes
Term life insurance can also be a great buy for business owners as well. For business owners looking to fund a buy-sell agreement or even cover a keyman employee, term life insurance is often the life insurance policy that would be used. In many cases in which a small business loan is needed, term life insurance is a great choice.
Return of Premium Term Life Insurance (ROP)
Return of premium term life insurance, also referred to as ROP for short, is our second type of temporary life insurance.
ROP term life insurance is just like regular term insurance except that at the end of the contract 100% of all premium payments will be returned.
Yes, that’s correct. All premiums will be refunded at the end of the life insurance contract.
Most ROP term life insurance policies are available in term contracts of 20 or 30 years with a few companies offering it in a 15-year option.
One drawback of ROP term life insurance is that the cost in most cases is double of what a regular term life insurance policy would cost.
ROP term life insurance is also a very debatable coverage, as some agents believe it to be a bad investment in premiums. Since the coverage is often double of a regular term policy, some believe investing that difference could be a better option.
In most cases, this can be true, but we wouldn’t suggest not considering the life insurance coverage if you like the thought of getting all your money back on your investment of the life insurance coverage.
Consider return of premium life insurance if…
- You’re ok with paying a little extra for life insurance coverage
- Insurance needs are 15 to 30 years long
- Less than age 60
- Enjoy the idea of getting all your money back when the life insurance ends
No Medical Exam Term Life Insurance
No medical exam term life insurance is the third type of term life insurance policy.
This type of life insurance provides the same type of life insurance protection as regular term insurance except, you’re able to bypass the entire life insurance physical.
Coverage comes in lengths of 10, 15, 20, 25 and 30 years with most companies allowing an option to convert to permanent coverage.
Most no exam term life insurance coverage has a maximum death benefit of up to $1,000,000 and a maximum age limit of 65.
It’s important to know that just because you’re able to skip the exam, it does not mean that you will automatically be approved. In other words, this is not guaranteed acceptance.
No medical exam life insurance still requires you to go through underwriting just the same as regular term insurance except you are able to skip out on the exam portion. This means no blood draw, urinalysis or blood pressure readings are needed.
Instead, underwriting uses other methods to underwrite policies such as the use of:
- Answers to medical questions on the application
- Medical Information Bureau (MIB) check
- Prescription database check (Rx)
- Motor Vehicle Report (MVR) check
- Financial check (not credit score check)
- Medical records if needed
These methods are what are commonly referred to as accelerated underwriting or simplified underwriting and can provide much quicker approval times.
Check out a no medical exam life insurance policy if…
- You need fast life insurance coverage
- Are between the ages of 18-65
- It’s been a while since your last physical
- Don’t require more than $1,000,000 of coverage
- Simply don’t wish to do a medical exam
Guaranteed Universal Life Insurance (GUL)
Up first on our list of permanent life insurance is guaranteed universal life insurance also referred to as GUL.
Guaranteed universal life insurance was introduced in the early 2000s and is what many life insurance agents believe to be a better alternative to traditional universal life insurance.
Although some companies still offer traditional universal life insurance, many companies have replaced it with guaranteed universal life insurance.
Guaranteed universal life insurance offers an affordable fixed premium and death benefit that is guaranteed to last to up to age 121. Even as you get older the life insurance coverage will never have an increase in premiums.
This is what sets GUL apart from traditional universal life insurance. Traditional life insurance is based on interest rates and cash build-up. Premium payments are not guaranteed to remain the same price for the entire length of the policy.
Guaranteed universal life insurance, however, does not focus on cash build but rather affordable permanent life insurance protection.
It is the cheapest of all permanent life insurance options with some policies offering a feature like return or premium as well as living benefits that payout early cash benefit if you get sick.
Why is Guaranteed Universal Life Insurance a great permanent option?
- Most affordable of all permanent life insurance options
- Premiums and death benefit are guaranteed to not change
- Great policy features such living benefits as well as return of premium
- Offered in a no exam option
- Perfect for both young families as well as seniors
Indexed Universal Life Insurance (IUL)
Indexed universal life insurance, also referred to as IUL for short, is permanent life insurance that is designed to build up cash values.
An indexed universal life insurance policy has several parts to the way it works and performs making it bit confusing not only to consumers but even life insurance agents too.
The easiest way to begin describing indexed universal life insurance is to understand its flexibility.
Unlike other types of life insurance coverage, indexed universal life insurance allows for both premium payments as well as the death benefit to be adjusted if need be.
What makes indexed universal life insurance different from all the other types of life insurance coverage is how the premiums work with the cash value growth.
Indexed universal life insurance is designed to allow you to allocate a portion of your premiums to go towards a fixed interest account as well as several different index accounts (DJIA, EURO STOXX 50, Hang Seng, NASDAQ 100, S&P 500) or both.
The performance of the index is based on a formula that tracks the gains and losses of that particular indexed account resulting in an annually declared interest rate. The annual declared interest is what determines how well the cash values will grow.
In addition to index accounts, IUL policies also designed with a cap and a floor. The cap limits your potential maximum returns, and the guaranteed floor (fixed account) protects you from potential losses in your cash values.
On the upside with there being a floor, also know as the guaranteed interest rate, you cannot lose your built-up cash. On the downside, the cap on potentially higher interest rates can limit your cash growth.
Outside of potential cash accumulation that IUL policies can provide, they also have some unique benefits. Those benefits include optional policy riders, tax-deferred growth and tax-free access to cash from your policy.
What are the Pros of Indexed Universal Life Insurance?
- Tax-deferred cash growth
- Cannot lose cash growth due to market changes
- Several optional policy riders
IUL policies benefit estate planning. It can also be a good option for those who wish to begin a policy for their child. When the child is grown, he or she can use the cash or take over the policy.
What to consider when considering purchasing an IUL policy…
Indexed universal life insurance is currently the hot new life insurance product. However, we at Top Quote Life Insurance are not the biggest fans just yet.
The potential cash growth can be nice, but with there being a cap on the interest rate it does limit your cash building potential.
This can either become very expensive or your cash value can take a big hit as you grow older the cost of insurance increases with age.
With GUL, this does not happen as it’s backed with a “guarantee” to have a fixed level premium regardless of how old you are.
IUL life insurance definitely has its place among the different types of life insurance policies, but if you’re considering one, let’s make sure it’s the right choice for you and weigh all options.
Variable Universal Life Insurance (VUL)
Variable universal life insurance is another form of permanent life insurance coverage designed around making cash values within the policy.
This type of life insurance policy is very different from all the other cash building life insurance policies as it works in part with several investment funds to build up potential cash values.
Similar to an IUL policy, variable universal life is also very flexible allowing for changes in both premiums and death benefit if need be.
One key advantage of VUL’s is that it allows for more control on where your premiums are invested, as there are generally several investment funds to allocate premiums for maximum cash growth.
Whereas an IUL has a cap on earning potentials, a VUL policy does not. However on the downside, if the market is bad you can run the risk of losing cash value.
An IUL does not allow for this to happen as the cash values are not invested in the market and the coverage has a guaranteed minimum interest rate.
Who can benefit from a Variable Universal Life Insurance policy?
VUL’s can be good for those that are looking for life insurance coverage with the best cash value building opportunity.
They could also be a valuable option for those requiring a supplemental retirement income, long term care funding or even a tool for business planning.
If considering a VUL life insurance policy, be aware of the potential investment risks that the market has on the cash growth. VUL’s need attention and must be monitored for adjusted if need be.
Whole Life Insurance (WL)
Whole life insurance is one of the most common and oldest forms of permanent life insurance coverage options available.
Similar to guaranteed universal life insurance, whole life also offers both a guaranteed death benefit along with a fixed premium that is designed to last up to an entire lifetime or until the policy has matured.
The difference between the two is within the potential cash value growth. Whereas guaranteed universal life insurance focuses more on low-cost permanent protection with very little cash growth, whole life insurance focuses on both permanent protection as well as higher cash value growth.
This is partly due to the fact that it is designed with both a guaranteed cash value but also earn dividends to further enhance the cash value build up in the policy.
Whole life insurance is considered to be one of the most expensive forms of life insurance. This is because of the money it needs to provide build up in the cash values of the policy.
One really good way to view whole life insurance is to think of it as a forced savings account with a death benefit.
Part of your premiums will go to the cost of the insurance while the other part will go to the “savings account” otherwise known as the cash-value account to grow and ultimately mature reaching the equivalence of the death benefit or greater.
Most whole life insurance policies are designed to have a premium-paying period to age 100 or 121. However, it can also be purchased in shorter durations known as limited payment options. Limited pay options are generally offered as single pay, 10 pay, 20 pay and even pay to age 65.
Paying a shorter pay period can result in quicker cash build.
Benefits of purchasing a Whole Life Insurance policy
- Provides a lifetime of protection
- Guaranteed cash value growth
- Can payout dividends to further increase cash growth and coverage
- Cash values are protected from the performance of the stock market
- Can provide tax-free funds by utilizing policy loans
- A good estate planning tool especially for high net worth individuals
The downside of Whole Life Insurance
- It’s expensive
- Surrendering the policy early can be costly
- Investing the cost difference between a term insurance policy and whole life insurance policy could yield better returns elsewhere
Final Expense Life Insurance (FE)
Final expense life insurance, also commonly referred to as burial insurance, is a type whole life insurance policy designed with seniors in mind.
The whole life insurance is considered non-participating, as it does not have the potential of earning dividends. Instead, there is a guaranteed cash value schedule along with a fixed premium that will remain the same throughout the entire life of the policy.
Final expense policies do not require a medical exam as they are underwriting under simplified guidelines. With that said, approval is not guaranteed and you can be declined with medical conditions considered to be high-risk.
Most final expense policies can be purchased with coverage amounts ranging from $2,000 and capped at $50,000.
How are Final Expense Life Insurance policies beneficial?
- A great option for seniors even with some medical issues
- Simple application process usually done online or by phone
- Approval generally made within 72 hours max
- Just enough protection for burial needs or small final expenses
Guaranteed Issue Whole Life Insurance (GI)
Guaranteed issue whole life insurance is the last of our permanent life insurance options. It’s nearly identical to Final Expense life insurance except that this coverage will accept everyone between the ages of 50-80 regardless of health.
Yes, that’s correct, regardless of your health condition, if you apply you will be approved.
All guaranteed issue life insurance policies have a 2 year graded death benefit. As previously mentioned, if death occurs in policy years 1 or 2, the only benefit paid is 100 of premiums plus 10% interest.
Guaranteed issue life insurance is currently available in coverage amounts ranging from $2,000 to $25,000.
Applications requires of basic personal information with no medical question asked.
Approval is often made same day as well.
Benefits of Guaranteed Issue Life Insurance
- Approval for any health issues
- Permanent protection
- Guaranteed cash values
- Same day approval
Accidental Death & Dismemberment Insurance (AD&D)
Accidental death insurance can be viewed as a form of supplemental life insurance. The coverage however only pays if death has occurred due to an accident whereas life insurance will pay if death has occurred due to both accident or health related.
Accidental death policies generally do not have strict underwriting guidelines and do not require you to take an exam or answer any medical questions.
Another great thing is that rates are not determined on whether you use tobacco or not.
Coverage can usually be purchased anywhere from $50,000 up to $500,000. Approval can also be made same day.
An accidental death benefit policy can be a very affordable option as a supplemental policy in additional to life insurance or even a standalone policy in itself.
In some cases for clients who have been declined due to high risk health conditions that needed more than what a guaranteed issue policy could offer, we have been able to at least get them covered with an AD&D policy at very low rates.
What do most Accidental Death & Dismemberment polices cover?
- Death caused by general accident
- Death caused while on a common carrier
- Death caused from a common carrier
- Dismemberment of a body part
What’s not covered in an Accidental Death & Dismemberment policy?
- Suicide or attempted suicide
- Intentional self injury
- Injury while intoxicated
- Injury while committing a crime or engaging in illegal activity
Long-Term Care Insurance (LTC)
Life insurance pays out a cash benefit when the death of the insured has occurred. Long-term care insurance is the opposite as it pays out a cash benefit over a period of time to help pay for long-term care expenses.
In order for a long-term care policy to pay out a benefit, the insured must require qualifying care whether it is the need of in-home services or the services of an assisted living center such as a nursing home.
Most qualifying long term care policies will require the insured to at least be unable to perform 2 of 6 activities of daily living (ADLs) in order for a benefit to begin paying. These activities include dressing, bathing, eating, toileting, continence, transferring and walking.
Long-term care policies tend to be on the more expensive side of insurance coverage. However, if any long-term care services are required it could end up saving you a significant amount of money if a policy is in effect.
Without long-term care coverage and the need for assisted living, the cost can become overwhelming to a family.
Another alternative to a long-term care policy that has recently become very popular on life insurance policies are riders called living benefits.
A life insurance policy with living benefits can pay out a benefit if the insured is not only able to unable to perform 2 of 6 activities but also a critical illness as well as a terminal illness.
Living benefits found on a life insurance policy are not as good as a true long term care policy, but they can help reduce the severe costs of long term care needs as well as be a much cheaper alternative to a long term care policy
What are the Pros of purchasing a Long Term Care (LTC) policy?
- Can reduce the expensive cost of long term care services
- Provides the funds to allow you to choose where you get care from and the quality of care
- Provides the funds to protect your assets and personal savings
- Provides peace of mind
What are the Cons of purchasing a Long Term Care (LTC) policy?
- Policies tend to be expensive
- Elimination periods can delay needed funds
- Rates can increase with age
- Life insurance policies that offer an LTC rider can offer a very close to comparable to a true LTC policy at a much lower cost.
How to choose a Great Life Insurance Company
With so many life insurance companies wanting to sell you a life insurance policy, how do you know which one to go with? How do you know if it’s going to be a great one?
One piece of advice that we can give is to do your research. Online is a great starting place filled with tons of information. A simple Google search of “best life insurance companies” will bring up several reviews of nearly every insurance company available.
The most important piece of advice that we can offer is to make sure you are working with an independent agency that can offer you several options.
For example, Top Quote Life Insurance is an independent life insurance agency that has access to over 25 of the top life insurance companies.
By being an independent life insurance agency we are able to shop your life insurance coverage with multiple companies making sure you’re getting the best rate for your coverage.
In addition to finding you great rates, we can also make sure you’re applying with the best company favorable to any health issues or other unique underwriting concerns.
Best of all, Top Quote Life Insurance only works with companies with an A.M. Best rating of (A) or higher.
How Much Life Insurance Do You Need?
When looking at the many types of life insurance, how do you determine the amount of coverage? This is not an easy question to answer. Insurance needs are complex and differ from person to person. However, we can help you make the choice easier.
The best approach is to look at your present and future financial needs. Age and income are other factors when determining the amount of insurance coverage that you need. The general rule of thumb for determining an adequate amount of life insurance coverage is to multiply your current gross income (income before taxes) by a minimum of 5.
Life insurance will provide your surviving family members with the money to cover outstanding debts and everyday expenditures after your death. In addition, it could also be useful to cover other major expenses, such as mortgages and other debts.
When considering how much death benefit protection you will need, factor in the following common financial expenses.
YOUR GROSS ANNUAL INCOME REPLACEMENT – multiply this number by the number of year needed to protect your family. Include regular bonuses and wage increase. (Generally this number is multiplied by at least 5-12.)
CASH NEEDS AND FINAL EXPENSES – costs of funeral expenses plus other costs associated with death, such as medical expenses for a last illness, estate settlement cost, property transfer costs, etc.
DEBT PAYMENT FUND – an amount required to pay existing debts that may become due immediately, such as car loans, credit cards, loans, etc.
MORTGAGE PROTECTION – an amount required to pay off the balance of the mortgage on the family home to allow the family to keep it.
EMERGENCY FUNDS – a fund set aside to meet routine emergencies of daily living, such as car repairs and home repairs.
EDUCATION FUNDS – an amount needed in the future to help fund children’s higher education.
Term or Permanent Life Insurance?
How do you determine which of these types of life insurance to choose? This is another question that doesn’t have an easy answer. The only true answer to this age-old question is to know exactly when you are going to die, and then a policy could be designed to specifically meet your needs.
Since more than likely, you do not know when you will die, the best type of policy will be a policy that meets your financial goals and needs over your lifetime, so policy will be active when death occurs or the need for protection ends.
When Choosing Between a Term Policy or a Permanent Policy Considers This:
Term Life Insurance:
- Cheapest form of life insurance coverage with a 10-year policy being the cheapest
- Great for covering needs for specific time frames such as 10, 15, 20, 25 or 30-year term lengths
- Renewable and in some cases convertible to permanent coverage
- Best source for temporary protection to solve temporary needs
Permanent Life Insurance:
- If you have long-term needs or permanent needs, consider permanent life insurance coverage
- Insurance does not require you to medical qualify in later years
- Coverage will not result in an increase of premium in later years
- Guaranteed to pay out a claim as it will always be there
Common Life Insurance Terms and Their Meanings
Throughout this article, we may have used a few life insurance terms that you may not be familiar with. For someone not in the insurance field, some terminology used can sound pretty funny. For that reason, we have put together some definitions or meanings behind some of these funny words to help make sense of what they stand for.
Cash Value: This is the amount of cash that the life insurance policy has built up that is payable to the owner of the life insurance policy. This is also referred to as the cash surrender value.
Contingent Beneficiary: A contingent beneficiary is a second individual to receive the life insurance proceeds should both the insured and the primary beneficiary die. The contingent beneficiary would become the primary beneficiary.
Conversion: A conversion is generally found on term life insurance policies and allows for the life insurance contract to be converted into a permanent life insurance policy without proof of insurability.
Death Benefit: This is the amount of money that is payable upon the death of the insured.
Dividend: This is a determined sum of money payable to the policy owner of the life insurance contract. Dividends are often associated with whole life insurance contracts and are not guaranteed.
Insured: The insured is the person the life insurance contract is covering in the event of a death.
Living Benefits: A living benefit pays all or a portion of the death benefit while the insured is alive should the insured become ill with a qualifying illness.
Policy Owner: This is the individual who owns the life insurance policy. The policy owner can be the insured or someone else as long as there is an insurable interest. The policy owner is the only individual who is authorized to make changes to the life insurance contract.
Policy Rider: A policy rider is an additional feature that can be added to the basic life insurance contract to enhance the coverage in different ways depending on the rider. Most policy riders require an additional charge.
Premium: A premium is the dollar amount you pay for the life insurance contract. Most premiums can be paid monthly, quarterly, semi-annually and annually.
Primary Beneficiary: The primary beneficiary is the main individual to receive the death benefit funds should the insured pass away. Should the primary beneficiary pass away the contingent beneficiary would be the next individual in line to receive the death benefit funds. It’s also worth mentioning that in most circumstances the death benefit proceeds are income tax-free.
Underwriter: This is the individual employed by the life insurance company who underwrites your overall risk to the insurance company. The underwriter evaluates your overall risk to decide if you are insurable for a life insurance contract with the company.
What’s the Best Type of Life Insurance Policy for you?
The differences in the life insurance policies can be confusing. Hopefully we met are main objective of this article which was to provide you with as information on each available type of life insurance policy out there.
If that objective was met, the next step is deciding which life insurance policy will be the best one for you and we can help you with that.
If you would like to go over your options, please contact us today and share with us your objectives and goals. We will be sure to fit you with the best life insurance policy to accomplish both those objectives and goals!