Most people don’t realize that life insurance comes in more flavors than one.
The most popular, of course, is term life insurance. And you probably hear about this category of life insurance in TV commercials all the time.
But term life insurance isn’t the only flavor. That would be like going to the ice cream shop and seeing that the only flavor available was chocolate. (You thought we’d say vanilla, didn’t you?)
But there’s got to be more flavors. Because, what ice cream shop doesn’t carry pralines and cream or rocky road?
So it is with life insurance. How you want your family secured after you die can’t just have one option. Everybody is different and they won’t all want the same thing for their family or loved ones.
So, today, we’re going to give you a comprehensive overview of all the “flavors” or types of life insurance available.
What Is Life Insurance?
Most people probably have a vague idea of what life insurance is. But before we get down to the types, we thought we’d go over the basics of what a life insurance policy is.
A life insurance policy is a contract with an insurance company.
In exchange for the money you pay for a premium each month, the insurance company guarantees a certain amount of money goes to the beneficiaries after the insured person’s death.
How this is paid out is based on the needs and goals of the insured person and their family or other beneficiaries.
These needs and goals determine the type of life insurance the insured person chooses.
So, now that you have a basic understanding of what life insurance is, let’s dig into the different kinds of life insurance available.
Types of Life Insurance: Term Life Insurance
This is the most basic life insurance option.
It offers a pure death benefit. There are not any cash value build ups in the policy.
This is probably the most affordable kind of life insurance. This is even more true for young people who are in good health when they purchase the insurance.
Academics are always trying to figure out ways to both predict death and delay it. They’ve come up with plenty of ways to predict death, but not as many ways to delay it.
You can’t predict your death with full certainty. And life insurance companies bank on you living a full life. Literally.
With term life insurance, you purchase a certain time frame. If you die in that time frame, the insurance company pays the agreed amount. If you don’t, you can increase your term or let it lapse.
The lengths usually are 10, 15, 15 and 30 years. Some term life insurances are longer.
You can even get a one-year renewable life insurance from some companies. This is one of the types of life insurance policies with minimal risk to you.
If you don’t like the insurance company, you can drop the policy after a year.
The amount of the premium for term life insurance typically stays the same throughout the term.
And once the term ends, you can re-apply for life insurance if you want. But your premium will be different because the factors that determine your premium have changed.
Types Of Life Insurance: Decreasing and Increasing Benefit Term Life Insurance
If you have investments accruing interest, your loved ones may not need to benefit from life insurance if you die later in the term.
You can get a decreasing term life insurance policy if this is the case.
The term ends when the death benefit reaches zero.
Another reason you might want a decreasing term insurance policy is your mortgage.
If you’re paying off your mortgage, it will decrease and your loved ones will need less money to pay it off.
You work with your insurance company, in this case, to match the benefits decrease with your mortgage decrease.
The consumer price index has risen in the past 5 years by 9%, which means cost of living has gone up.
If cost of living is going up, the amount your family will need once you die will go up the longer you live.
This is why increasing term benefit life insurance exists. To match inflation and cost of living.
If you are a young parent, this might be one of the types of life insurance for you.
Types Of Life Insurance: Permanent
As the name suggests, permanent life insurance does not end until you die. As long as you keep paying the premium, the insurance stays in effect.
These types of life insurance typically include a cash value component, which we’ll go over in a minute.
Let’s go over the types of life insurance that are permanent.
Whole Life Insurance
If you’re looking for a simple option that’s permanent, then whole life insurance is your plan.
The premium does not change with this type of life insurance. You keep paying the same amount your whole life.
It’s great for budget minded people who have only a certain amount of money each month to spend.
Another great thing about this insurance coverage is that inflation, age, health and other factors do not change the premium.
If you have pre-existing conditions, this may be your only option.
A cash value component is placed on this policy. The cash value component is essentially a savings account.
A portion of your premium each month goes into this account and interest accrues.
This account is tax-deferred with whole life insurance, meaning that you won’t pay taxes on it in your lifetime if you withdraw none of it.
Your loved ones will pay tax on it at the time of your death, however, so this should be clear to all the beneficiaries.
The percentage of your premium that goes to this account will grow because at a certain point the agent’s commission and the insurance costs will be paid off eventually.
Universal Life Insurance
Of the types of life insurance that are permanent, this one is the most flexible.
You can change how much of your premium goes to either the death benefit and the cash value account.
This comes with particular guidelines set with your insurance company.
You will have access to the cash value account just like any other permanent policy. You can borrow or withdraw from the account at any time. But realize this will change how much comes out at the end.
Variable Life Insurance
Another of the types of life insurance is variable life insurance.
This is also permanent.
If you want a better return on investment in your cash value account, then you might want to go for equities instead of a straight savings account.
This is one of the features of a variable life insurance policy.
There, of course, is more risk in putting your money into equities as these are tied to the market.
This cash is not invested directly in the markets, however, but placed in sub-accounts.
There is a guaranteed amount that will be paid out in the end not matter if the equities do poorly.
But the benefit can be quite higher if the equities do well.
Variable Universal Life Insurance
This is similar to universal life insurance. But in these types of life insurance, the insured can invest in mutual funds with their cash value component.
But, the risk is great with this kind of insurance policy as there is not guaranteed minimum cash value. So you could risk losing everything you put into this policy.
The Types Of Life Insurance: Survivorship Life Insurance
This policy is taken out on multiple people. Usually a married couple.
You can set up this kind of insurance in a few ways.
There is a first to die option. The benefit is paid when one of the insured dies.
The premium is higher on this kind of policy than most because you’re insuring two people and doubling the chances of a payout.
But, it’s also less expensive than taking out two insurance policies as most companies give a discount for survivorship policies.
Joint and survivor policies are the other kinds of survivorship life insurance policies.
This is a last to die policy. This means that coverage continues until the last person on the policy dies.
This fits within both the term and permanent coverage categories as it could be either.
And they are cheaper than most policies. This is true especially if one or both individuals are in great health.
Types Of Life Insurance: Final Expense Life Insurance
This is meant to cover burial costs. And usually, it’s purchased later in life to help out the surviving member of the family with funeral costs and burial costs.
The average cost of burial is $7000 and those costs can be as high as $10,000.
Most people don’t have $10,000 just laying about to pay for a funeral. So this is a great way to ensure that your loved ones are able to grieve your loss without worrying about costs.
Types Of Life Insurance: No Medical Exam Life Insurance
If you need life insurance, but you have certain medical conditions, you can purchase life insurance that doesn’t require a medical exam.
This is a quicker approval process as well.
Choosing The Right Insurance
If you are still having trouble choosing an insurance policy, sit down with your loved ones and talk it out. Sometimes it takes an outside perspective to help you choose.
Do you have life insurance, what type of life insurance did you choose and why? Let us know in the comments below.