What do ice cream and life insurance have in common? They both come in a variety of flavors, and if you’re not sure what kind to buy, you can end up with regrets.
With life insurance, we call our flavors “types” of coverage, and these types vary widely in price and performance.
So before you dig any deeper into your life insurance search, let’s take a few minutes to review coverage types so you can assess your taste, or need, for coverage.
- Term Life
- Whole Life
- Universal Life
- Final Expense
- Key Person
- No Exam
- What Plan Is Right For You?
Types of Life Insurance Explained
Despite all the different kinds of policies you can find, your policy will ultimately come from one of two families of coverage: term or permanent.
Term life insurance lasts for a specific period of time, known as the policy’s term. Permanent, also known as whole life insurance, can last the rest of your life. Let’s take a closer look at this breakdown.
Term Life Insurance
As a simpler and more temporary product, term life insurance usually appeals to younger shoppers in their 20s, 30s, or 40s.
A term policy comes with an expiration date, usually 10, 15, 20, or 30 years from its date of purchase. While some see this expiration date as a drawback, it also has some advantages:
- Affordability: Because term life does not last forever, it usually costs less.
- More Coverage: Lower rates mean you can leverage higher coverage amounts. Some policyholders have secured up to $2 to $3 million in coverage.
- Simplicity: Unlike whole life, term life does not get tangled up with investments or added cash value. So canceling your policy wouldn’t impact other parts of your life as much.
Someone who is young and healthy and just starting out in adult life should consider term life. You’ll get the best rates and have the most coverage to protect your growing family if the worst happens.
Term life also gives you a simple promise: in exchange for your regular premiums you’ll know your beneficiary has access to a financial safety net if needed.
Whole Life Insurance
As we’ve already said, whole life coverage can last the rest of your life. As a result, you’d likely pay more for the same amount of coverage compared to a term life policy.
Along with providing permanence, a whole life policy’s higher premiums also fund an additional cash account that gives your policy more and more value, and flexibility, as time passes.
This cash value works a lot like a savings account. Later in life, after the policy accrues enough value, you can borrow against the value or cancel the policy and claim the cash. Some policyholders even donate their policies to charity.
More Complex Whole Life Policies
While all life insurance can still be defined as term or whole, several more complicated and need-specific products have evolved in recent decades.
Universal Life Insurance
A traditional whole life policy maintains a separation between the policy’s coverage amount and its added cash value. Universal life insurance coverage lets these two funds interact.
This interaction can let you make helpful changes to your policy later in life. For example, if after 20 years you’ve accrued a significant cash value in your policy, you could use the cash to help pay your premiums.
With this approach, you could keep the same coverage in force but pay less for it, which could come in handy if you’re retired or lose a job.
You could also take the opposite approach: lowering your coverage amount to help enhance your policy’s cash value. This approach could help when you no longer need as much coverage but would like to keep using the policy to save for the future.
Guaranteed Universal Life Insurance
With a universal life policy your coverage could lapse if you exhaust the cash value by using it to pay premiums year after year.
A guaranteed universal policy remedies this weakness by guaranteeing your coverage amount even if your cash value reaches zero.
Typically, these guarantees come with an expiration date — age 95 or age 121 in most cases.
Indexed Universal Life Insurance
Indexed universal coverage lets you connect your policy’s cash value to a securities index such as the S&P 500 or the Nasdaq 100. When the stock index increases, your cash value increases with it. Likewise, when the index declines, you’ll lose value.
Most indexed universal policies cap earnings as a way of preventing losses.
Variable Universal Life Insurance
Like indexed universal coverage, you can invest your cash value with a variable universal policy. A variable policy gives you more control over how you invest the money.
Rather than connecting your cash to a stock index, you can choose specific securities you’d like to invest in. Typically, an insurance company will give you a list of investment choices.
These policies can expose your cash value to greater risk. Because your cash value and your life insurance coverage interact, you could even lose part of your actual coverage amount if you lost too much of the policy’s cash value.
Most shoppers should consult their financial advisor before buying these kinds of policies.
Need-Specific Life Insurance
Most people buy coverage because they want to protect people they care about from financial insecurity. But life insurance can have more specific applications.
Final Expense Insurance
Final expenses such as funeral, burial, or cremation fees cost $10,000 to $12,000 in many cases. Life insurance can help provide this money when you die so your family doesn’t have to pay.
Many people opt for simplified or guaranteed issue whole life insurance to provide this coverage. These policies offer smaller amounts of coverage and do not require the applicant to undergo a medical exam.
Key Person Insurance
Key person coverage, also known as key man or key woman coverage, can help a business buy some time if a key executive dies unexpectedly.
In some small businesses, the owner or chief executive has unique knowledge about the company’s operations. It could take weeks or months, or even longer, for a business to recover from the death of such a key figure.
The life insurance payout could help the company stay afloat while it sorted things out. With key person coverage, the company itself buys the policy, pays the premiums, and is the policy’s beneficiary.
You could assign any life insurance policy’s death benefit, or just a portion of the benefit, to your lender for use as collateral. Once you pay off the debt, you should revoke the collateral assignment.
Executive Bonus Plans
Some corporations use life insurance policies to help compensate their high level employees. Executive bonus plans allow a company to pay life insurance premiums on behalf of the employee.
This kind of compensation isn’t taxed like other income which helps corporations add employee perks for less. Some companies call these 162 bonus plans in reference to the IRS code allowing them.
No Exam Life Insurance
Traditional, medically underwritten coverage requires applicants to undergo a medical exam. The exam measures blood pressure, body-mass index, cholesterol, and requires blood and urine lab samples.
A lot of applicants prefer to avoid the life insurance medical exam. Some applicants consider the exam an invasion of privacy. Others simply fear needles or don’t want to spend the time making and keeping a medical appointment.
No-exam policies allow applicants to skip the exam, but these policies come with a cost: Lower coverage amounts and higher premiums.
No-exam policies include:
Simplified Issue Insurance
Rather than a medical exam, simplified issue coverage requires applicants to return a detailed questionnaire about their health, their family’s health history, and their lifestyle choices.
Underwriters will also check databases for information about applicants. These policies cap coverage at $250,000 to $350,000, which is significantly less than the seven-figure benefits medically underwritten coverage can offer.
You’ll also pay higher premiums since underwriters do not know as much about your health. Term or whole policies can use simplified issue underwriting.
Guaranteed Issue Insurance
Guaranteed issue (not to be confused with guaranteed universal) life offers a small amount of coverage — usually $25,000 to $35,000 max — to almost any applicant.
Underwriters seek almost no information about an applicant’s health. Premiums cost a lot in relation to the benefit, and guaranteed issue policies usually come with a graded benefit.
Graded benefits mean policyholders will pay premiums but will not become eligible for the policy’s full coverage amount for two to three years. Guaranteed issue policies can work well as burial insurance.
Life Insurance Riders
Whether you buy a simple term life policy or a more complicated whole life plan, you can further customize your insurance by adding riders.
Riders are kind of like toppings — you don’t have to add them, but they can add a new element to your coverage. They’ll also add more cost. Common riders include:
- Return of Premium: If your term policy expires before you die, you could reclaim all the premiums you spent on the coverage if you have a return of premium rider.
- Guaranteed Insurability: With this rider, you can always renew your policy even if your health changes in a way that could prevent you from getting new coverage.
- Waiver of Premium: If a disability prevents you from working, you can keep your coverage for a while without paying the premiums.
- Accelerated Death Benefit: This rider lets you access your policy’s death benefit early if you’re diagnosed with a terminal illness.
- Accidental Death Insurance: Also known as a double indemnity rider, this addition could double your death benefit if your death results from an accident.
This is only a small sampling of the available riders you can find. Typically, you’ll need to add riders when you purchase your policy.
Finding Your Right Type of Coverage
Ultimately, your ideal coverage type should depend a lot on the answer to this question: Why do you need life insurance?
- Someone who needs coverage to replace income, pay off large debts, or plan for the future will likely need the larger coverage amounts term life can offer.
- Someone who wants the most coverage for the least amount in premiums should also consider term life first.
- An applicant who needs a smaller coverage amount but wants a policy to accrue value should consider whole life coverage.
- Someone who wants the benefits of whole life with the ability to change premium amounts in the future should shop for universal policies.
- An applicant who would like the ability to invest his or her policy’s value will need an indexed or variable universal policy.
- An applicant concerned about taking a medical exam will find no-exam coverage appealing; however, you can save a lot of money in premiums by taking the exam if you’re healthy.
Along with your coverage type, you’ll also need to consider how much coverage to buy and how long to keep your coverage in force.
Your life is unique, and your life insurance should reflect your goals and your needs. By shopping around and learning your options, you can get connected more easily with just the right type of coverage.