Most types of life insurance belong to one of two categories: term life and permanent life insurance. Term life policies include a set term length, typically ranging from 5 to 30 years. Permanent life insurance is good for life. There are also multiple types of permanent insurance, including universal, whole life, variable, and final expense life insurance.
Main Categories of Life Insurance
Depending on which insurance company you go through, you’ll get to choose from several types of insurance. The main categories include:
- Term life insurance
- Whole life insurance
- Universal life insurance
- Variable life insurance
- Final expense life insurance
Term life has a limited term while the other types of life insurance are considered permanent life insurance policies. A permanent life insurance policy is good for life.
Each of these options includes a death benefit, which is a payout given to your beneficiaries upon your death. However, there are also many differences between each type of insurance. Here’s what you should know.
Term Life Insurance
Term life insurance policies come with a set coverage length. The most common term lengths include 10, 15, 20, and 30 years. However, some insurance companies offer terms of just 5 years.
As some policyholders outlive their policies, insurance companies don’t always pay a death benefit. This allows them to offer higher death benefit amounts and lower premiums.
These features also make term life attractive to younger people wanting coverage for a specific period of their life, such as their remaining working years before retirement.
At the end of the term, your policy ends. Unless the insurance company offers a return of premium rider, you don’t get a refund or a payout. However, you can often renew the term life policy or convert it to a permanent life insurance policy.
Whole Life Insurance
Whole life insurance is a form of permanent insurance. You get coverage for life if you continue paying the premiums.
Whole life policies also tend to include a cash savings feature. The cash value grows at a rate so that it equals your death benefit at a certain age, such as 100. If you live long enough for the cash value to equal the death benefit, the insurance company will pay off the policy. You get your death benefit and no longer need to make payments.
Insurance companies may also allow you to withdraw a portion of the accumulated cash value before reaching the cut-off age. You can withdraw funds as a loan with interest.
Whole life policies tend to include higher premiums compared to term life policies because you get covered for a lifetime. However, your premiums remain fixed for life, giving you greater predictability compared to other forms of permanent life insurance.
Universal Life Insurance
Universal life is another type of permanent life insurance. As with whole life insurance, you get coverage for the rest of your life. However, universal life insurance doesn’t come with fixed rates.
The interest rate for cash value accumulation varies based on the current market. Insurance companies also typically include a minimum interest rate.
Universal life insurance policies also allow you to adjust the death benefit amount. You get a higher level of flexibility compared to whole life insurance, along with the potential for higher costs and slower cash value accumulation.
You can even use your cash value to pay your premiums. The drawback is that policyholders need to use more caution and planning with this type of policy.
The premiums may change, which can change your monthly payments. Skipping payments allows your policy to lapse, keeping your beneficiaries from receiving a death benefit should you pass away.
Variable Life Insurance
Variable life insurance is distinct from universal life insurance, as it allows you to select investments for your cash value funds.
If your investments perform well, you may end up leaving your beneficiaries a larger payout. However, this type of insurance also comes with greater risk, as poor investment performance could lower the payout.
While the cash value may vary, the face value of the death benefit remains fixed. You can ensure that your beneficiaries receive a minimum amount, no matter how the investments perform.
Final Expense Life Insurance
Final expense is a type of permanent life insurance typically meant for older individuals or those wanting to specifically cover their final expenses. The maximum death benefit is often smaller compared to other types of insurance, as it’s intended to cover funeral costs and outstanding debts, such as medical bills.
Other Types of Life Insurance
Along with the main five categories of life insurance, there are other options available, including:
- Indexed universal life insurance
- Simplified issue term life insurance
- Guaranteed life insurance
- Instant life insurance
Indexed universal life insurance invests your cash value funds in a particular stock index, such as the NASDAQ, Dow Jones, or S&P 500. As with variable life insurance, this option offers the potential for greater cash value growth, along with greater risk.
Simplified issue term life insurance is a no-medical-exam insurance policy. You don’t need to take a medical exam, allowing almost anyone to qualify. This also results in higher costs but may be the only option for those with health conditions that would normally disqualify them from other policies.
Guaranteed life insurance also skips the medical exam. However, there’s no risk of getting turned down. You can get coverage, no matter your health.
Instant life insurance is a type of simplified issue life insurance available online. You can get a quote in seconds and have your plan approved in minutes. It’s a fast, convenient option for those who just want a basic term life policy.
For those seeking life insurance for the first time, trying to understand the variety of options can seem overwhelming. To choose the right type of insurance based on your needs, start by picking between term and permanent insurance.
Term life includes a set timeframe, making it more affordable and a popular option for younger people. Permanent life insurance remains in force for the rest of your life if you continue to pay the premiums.
