Although the number of types of life insurance products can be overwhelming for many people seeking coverage, having a selection of many products to choose from that can respond to different needs should be worth the unintended confusion.
At its core, life insurance is simply a promise to pay a benefit in exchange for a premium. What’s different about the life insurance promise in various products is that it can be short-term (Term Life Insurance) or long-term (Whole Life Insurance or Universal Life Insurance).
Moreover, if an applicant wants to have an investment component included with that coveted promise to pay, there are types of life insurance that will allow the policyholder to create potential wealth over time.
Consumers can agree that the best part about having multiple insurance companies that offer so many different products is the resulting competition that typically results in tremendous value for the consumer.
The different types of life insurance are:
- Term Life Insurance – temporary coverage
- Whole Life Insurance – lifetime coverage
- Universal Life Insurance – flexible lifetime coverage
- Variable Life Insurance – earns tax-deferred interest
- Simplified Issue Life Insurance – no medical exam
- Guaranteed Issue Life Insurance – no health questions or medical exam
- Final Expense Insurance – funeral and burial coverage
- Group Life Insurance – instant issue
Term Life Insurance
Currently, the most affordable life insurance available, term life insurance is considered temporary life insurance because it is acquired to cover the temporary needs of the applicant. Term life insurance is the least expensive of all types of life insurance because it provides coverage for a finite period of time (the term) and builds no cash value.
Generally, individuals that purchase term insurance do so to financially protect surviving loved ones for expenses like mortgage payments, credit card debt, college tuition, and general living expenses.
Since these expenses are temporary, term insurance is the most affordable method for covering financial risks that will eventually (hopefully) disappear.
- Pros: The pros of term life insurance are the affordable premiums, optional riders that can broaden the coverage, and the ability to convert the policy to permanent life insurance before it expires without having to go through medical underwriting.
- Cons: Term offers temporary coverage and builds no-cash value over time. If a term policy is canceled or expires, the policyholder does not receive any refund of premiums that were paid to the insurance company.
Term Life Insurance is best suited for young to middle-aged adults who want to purchase a fairly large death benefit that can replace the policyholder’s income in the event of unexpected death.
Types of Term Life Insurance Policies
Although most adults know that term life insurance is a super-affordable life insurance product, many are unaware that there are many different types of term life products to choose from.
Level Term Life Insurance
Decreasing Term Life Insurance
Decreasing term life insurance, also known as credit life insurance (or mortgage insurance) used to be used to cover a specific debt amount for a specific time. It was designed so that the death benefit would decrease as the debt amount decreased and the premium would decrease accordingly. Since level term life insurance has become so affordable, decreasing term policies are not as prevalent as they used to be.
Group Term Insurance
Group term insurance is guaranteed issue term life insurance that is sold to groups such as large employers and associations. Since rates are calculated across the entire group, members of the group are not subject to medical underwriting.
Group term policies are generally not portable and the death benefit is limited to a multiple of the applicant’s income. Additionally, group term policy premiums do not remain level and typically increase every five years.
Annual Renewable Term Life Insurance (ART)
Annual renewable term is a one-year insurance policy that is most commonly used by life insurance companies when a policyholder elects to renew a term policy at the end of the initial term period. In most cases, this policy can be renewed each year for a stated number of years but the premium will increase with each yearly renewal.
Mortgage Protection Life Insurance
Mortgage protection life insurance is a decreasing term life insurance policy that is specifically purchased to pay off the policyholder’s mortgage balance if they die during the term of the policy. The death benefit of the policy typically covers at least the mortgage balance at the time of purchase and the policy term is a least the length of the mortgage.
For example, an applicant who has 28 years left on a mortgage with a $287,000 balance, would generally purchase a $300,000 30-year policy. With mortgage protection life insurance a spouse or family member is the beneficiary, not the mortgage company, which means the beneficiary is not legally required to pay off the mortgage with the death benefit.
Return of Premium Life Insurance (ROP)
ROP life insurance is a term insurance policy with a return of premium rider that has been purchased by the applicant. This rider provides for the insurance company to refund all premiums paid if the policy owner outlives the policy term.
With most insurance companies, even if the insured cancels the policy near the end of the term, the policy owner would get a pro-rated refund of premiums paid to the insurer. The policy contract will include a refund schedule so the policy owner can determine the premium refund amount if they cancel the policy before the end of the term. While this option was a popular option several years ago, this type of policy is hard to find now.
Whole Life Insurance
Whole Life Insurance, which is the oldest of life insurance products available today, is life insurance that is designed to provide a death benefit for the entire life of the policyholder.
This means that as long as the periodic premiums are paid, the life insurance company cannot cancel the insurance policy for any reason and the policy will remain in force the life of the insured.
One similarity to term insurance is that with whole life insurance, once the policy has been issued, the insurance company cannot raise the periodic premium for any reason.
Additionally, whole life insurance policies have a cash value account that earns a guaranteed rate of interest every year which is tax-deferred to the policy owner.
- Pros: As the policy builds cash value over time, the policy owner can access those funds via policy loans, cash withdrawals, or by surrendering the policy for cash.
- Cons: Whole life insurance premiums are higher than other policy types because the policies last for the lifetime of the insured thus the mortality rate is much higher for whole life insurance versus a non-permanent policy like term life insurance.
Whole Life Insurance is best suited for applicants who want a cash component and lifetime coverage. Whole Life is also one of the few preferred insurance products for those who are setting up a life insurance retirement plan (LIRP) or plan to implement a “be your own banker” strategy. Whole life is also the primary insurance policy used by seniors for Final Expense or Burial Insurance.
Universal Life Insurance
Similar to whole life insurance, Universal Life Insurance is considered a permanent life insurance policy with a cash component attached. Many describe it as term life insurance with an annuity attached.
In actuality, Universal Life is very different from a term policy with an annuity because if properly funded, a universal life policy will provide lifetime coverage and the premiums are flexible rather than level.
The cash value account in a universal life policy typically earns the greater of a guaranteed minimum interest rate or a market rate that is based on the performance of the company’s investments.
Like whole life insurance, the cash in your universal life policy can be accessed through policy loans, withdrawals, or partial or complete surrender.
- Pro: Each policy contains a cash value account and the cash can be accessed by the policy owner for any reason.
- Pro: Universal life insurance is a flexible product. The policy owner can modify a monthly premium when needed or increase or decrease the death benefit to accommodate life events.
- Pro: Universal Life Insurance is considered permanent life insurance coverage when the policy is properly funded.
- Con: Premiums are generally higher than term life insurance.
- Con: Earnings are limited to the investment performance of the company or a minimum guaranteed rate which can be lower than traditional investments.
- Con: Policy and management fees can negatively impact policy growth over time.
Universal Life Insurance is a good fit for individuals who prefer affordable permanent life insurance with the ability to accumulate cash over time. For individuals who have problems maintaining a regular savings program, the universal life policy provides a method of forced regular savings.
Variable Life Insurance
Universal Life is also available as a Variable product. The primary difference between traditional permanent life insurance and Variable life insurance is how the cash component in each policy earns interest.
With a variable universal life policy, the cash value earns interest based on the performance of investment accounts (sub-accounts) rather than a minimum guaranteed interest paid by the insurance company.
With a Variable Universal Life, instead of earning interest from the insurance company’s investment performance or the minimum guarantee amount, the policyholder earns interest based on market performance which can be significantly higher.
- Pro: Variable life policies can accumulate more wealth because of increased earnings than traditional universal life or whole life policies.
- Pro: Policy owners can withdraw cash from the policy via policy loans that are considered tax-exempt.
- Pro: Variable Life insurance is not subject to the same governmental restraints as other traditional investment products since it is an insurance policy. There are no contribution limits, early withdrawal penalties, or required minimum distribution rules.
- Con: Unlike other insurance products used for wealth accumulation, variable life insurance policies can lose its cash value if the market performs poorly.
- Con: Compared to other cash value life insurance products, policy fees, administrative fees, management fees, loan interest, and surrender fees can have a significant impact on the policy’s investment performance.
Variable Life Insurance is best suited for individuals who are looking for an insurance product that can provide life insurance for a lifetime while accumulating wealth that can be accessed and used as a tax-exempt income stream.
Simplified Issue Life Insurance
The term “simplified” describes the underwriting process of a life insurance policy rather than the type of life insurance. For example, term life insurance and whole life insurance can both be considered simplified issue life insurance since both insurance types also have no-exam products available to prospective customers.
In general, simplified issue life insurance is an insurance product that has simplified its underwriting process by removing the requirement for a medical exam. These types of policies are generally priced a little higher than fully underwritten policies and are issued much quicker.
- Pro: The simplified issue process can apply to term life insurance and permanent life insurance.
- Pro: No medical exams are required and policies are typically issued in a matter of days rather than weeks.
- Con: Simplified issue life insurance is typically priced higher than fully-underwritten insurance policies.
- Con: Simplified issue life insurance policies typically have a maximum death benefit of $1,000,000.
Simplified issue life insurance, although commonly sold to any consumer, is best suited for applicants who need insurance coverage quickly due to a loan requirement or divorce decree. There is also a large segment of the market that prefers not to submit to a medical exam because of convenience and privacy issues.
Guaranteed Issue Life Insurance
With guaranteed issue life, there is no medical underwriting required to purchase life insurance. Any person who is within the eligible age requirements can purchase guaranteed issue life insurance as long as they are alive at the time of purchase.
These are whole life policies that typically issue instantly. They are priced significantly higher than traditional life insurance, they will have a maximum coverage amount of about $25,000 to $30,000, and they will have a two-year waiting period before the full death benefit is payable to the beneficiary.
During the waiting period, the insurance company will typically pay 110% of the premiums paid if the insured dies from natural causes. If death is the result of an accident, the full death benefit will be paid from the first day of coverage.
- Pro: People with severe or multiple health conditions who cannot qualify for traditional life insurance are guaranteed approval for life insurance coverage.
- Pro: Since the policy is whole life insurance, the policy cannot be canceled as long as premiums are paid, the monthly premium will never increase, and the policy will build cash value over time.
- Con: Premiums are significantly higher than traditional life insurance, death benefits are capped at about $25,000, and there is a 2-year waiting period.
- Con: Although there are hundreds of life insurance companies in the U.S., there are only a handful of companies that offer guaranteed insurance life insurance.
Guaranteed issue life is best suited for individuals who cannot medically qualify for traditional life insurance and need life insurance coverage as soon as possible to make certain funds are available to surviving loved ones for funeral and burial expenses.
Final Expense Insurance
Final expense life insurance is an insurance policy that is purchased specifically to pay the final expenses that will be left by the insured.
Typically, the final expenses that an applicant wants to be covered are funeral and burial costs, nursing home expenses, and medical bills not covered by the insured’s health insurance.
This is a fast-growing segment of the life insurance market because final expense insurance is marketed towards baby boomers who are rapidly aging into retirement. Many companies offer final expense insurance and most of them target 50 to 80-year old consumers.
Even individuals who carry traditional life insurance will purchase a final expense policy to make certain there are funds available to pay the cost of funeral and burial services which on average, are between $8,000 and $10,000.
- Pro: No medical exam is required and most companies have liberal underwriting guidelines.
- Pro: Many companies offer coverage for seniors up to 85-years old.
- Pro: Since many companies offer final expense insurance, the competition helps keep the premiums affordable.
- Con: Policy death benefits are usually capped at $30,000 to $35,000.
- Con: Prices are higher than fully-underwritten whole life policies.
Final Expense Insurance is best suited for seniors who want to leave the necessary funds to cover the final expenses that will be left for surviving loved ones to deal with. This product also provides insurance solutions for seniors who are uninsured or have term policies that they will likely outlive.
Group Life Insurance
Group Life Insurance is generally a 5-year Term Life policy that is available to employees through their employer Union members, and members of large associations like AARP.
These policies are considered guaranteed issue because as long as you are qualified to purchase coverage, you will not be turned down.
Typically, these are non-portable policies and will cancel if the policyholder leaves the employer, association, or union. In most cases, the policies are renewable every five years but premiums will increase according to the new age group of the insured.
- Pro: Qualified employees and members are guaranteed coverage regardless of health.
- Con: Policies are not portable and rates generally increase every 5 years.
- Con: Death benefits are limited to a multiple of the applicant’s annual earnings.
Group Life Insurance is a good choice for anyone who is qualified to purchase, especially employees or members who have health issues that would normally prevent them from buying traditional life insurance.
Joint Life Insurance
Joint Life Insurance was designed to cover two lives (married or partners) and is unique because a death benefit isn’t paid until both insureds have died.
Joint Life can be a Universal Policy or Whole Life Policy and is generally used for estate planning and estate transfer purposes. Joint life insurance is also commonly used to insure the parents of a special needs child so that the child’s financial needs can be met even after both parents have passed away.
Joint Life is a logical choice because it is generally a less expensive way of insuring two people at the same time because the underwriting is typically focused on the younger and healthier of the two persons being insured.
When a couple is considering joint life insurance for estate planning often times a trust is involved so it behooves the applicants to consult an attorney and insurance professional who is experienced in estate planning.
- Pro: A joint life insurance policy is cheaper than purchasing two separate policies.
- Pro: Underwriting and rates are based on the younger and healthier insured.
- Con: Since joint life insurance is typically purchased for estate planning, an experienced insurance professional and attorney should be involved in the planning.
Joint life insurance is especially suited for married couples, partners, or business partners who want to make sure the transfer of ownership of an estate or business can be done without the tax liability forcing the sale of a portion or all of the property being transferred.
No Medical Exam Life Insurance
When life insurance companies require a medical exam, they do so in order to confirm the health risk of an applicant and they benefit from having a medical professional see the prospective customer in person. Although this does provide a benefit to the underwriting process (especially for $1 million-plus policies) it can be costly and delay approval time.
With innovative 21st Century technology, many life insurers have chosen to offer life insurance products that do not require a medical exam because the companies are confident that the information they collect from the Medical Information Bureau, a prescription drug database, and the life insurance application is enough to determine an accurate health risk.
Most companies that offer no medical exam life insurance charge slightly higher rates and cap the available death benefit at $1,000,000 or less. Using the new underwriting technology, consumers will benefit by not having to undergo a life insurance medical exam and they will typically get approval from the company and a policy issued in a matter of a few days.
- Pro: Not having to deal with the inconvenience and privacy issues of a medical exam.
- Pro: Rates are either the same or slightly higher than traditional underwriting and applications are approved much quicker.
- Con: Coverage limits are typically $500,000 to $1,000,000.
No medical exam life insurance is a good solution for applicants who prefer not to deal with the inconvenience of a life insurance exam and those who consider it an invasion of privacy.
Accidental Death Insurance
Apparent by its name, accidental death insurance pays a death benefit only if the insured dies as a result of a covered accident.
Many of the insurance companies who offer accidental death insurance also offer a benefit if the insured becomes dismembered because of an accident. In most cases, the dismemberment benefit is less than the death benefit and the loss requirement is typically for one or more limbs, eyesight, or hearing.
Since the mortality rate for accidental death is much lower than death from natural causes, the premiums for accidental death policies are very low and there is no medical underwriting.
- Pro: Since rates are very low, this coverage can easily be added on to traditional life insurance policies using a rider.
- Pro: Because only death resulting from an accident is covered, there is no medical underwriting, and policies are generally issued instantly.
- Con: Most policies will reduce the death benefit once the insured reaches age 60 or 65.
Accidental death insurance is most suitable for individuals who want to increase the benefit of a traditional policy, individuals who cannot qualify for a standard policy and cannot afford guaranteed issue life insurance, or people who may be traveling by air or boat and want additional short-term coverage.
Things to Consider When Choosing a Life Insurance Policy
Certainly, not all insurance shoppers are alike. Many have different needs for buying life insurance and different feelings about life insurance in general.
Whether you are considering life insurance to replace your income or to leave a financial legacy for an heir or a charity, or for any other of the multitude of important issues that life insurance can resolve, it’s essential that you choose the right policy for your particular circumstances.
To make certain that you select the best type of life insurance to meet your needs and budget, it’s important that you connect with an independent insurance agent who represents multiple insurance companies that offer multiple products.
In my 20+ years as an independent life and disability insurance broker, I have personally assisted thousands of clients with their life and disability insurance needs. Being independent, I represent many highly-rated insurance companies and, because I am not beholden to any one insurance company, my focus is to find the right company and policy for each individual client. I believe that when people shop for insurance (or anything else, for that matter) on the Internet, they are looking for a simple, non-intrusive, non-pressure method of doing so. I strive to treat my prospective clients with the utmost respect and I believe an educated prospect can make the right decision without sales pressure. Please feel free to contact me at your convenience.