Types of Life Insurance
First… You need to know that there are ONLY two types of life insurance policies. There are Temporary (Term Life) and Permanent (Universal life or Whole Life).
Regardless of what “kind” of policy you choose, it will fall into one of the two types mentioned above.
Here’s a brief summary:
- Term life insurance is suitable for most people. It lasts for a specific number of years. If you don’t die within the time frame specified in your policy, it expires with no payout.
- Permanent life insurance Consists of policies such as universal life and Whole Life and usually include a “cash value” account, which builds value over time. Eventually, you may have enough cash value to take a loan against the policy to use for large expenses, such as college.
To get a better understanding, I created this Comparison of the different types of life insurance
Comparison of Different Types
| Term | Permanent | ||
|---|---|---|---|
| Features | Term Life Insurance | Universal Life Insurance | Whole Life Insurance |
| Duration | 10, 15, 20 - 40 years | For Life | For Life |
| Builds Cash Value | No | Yes | Yes |
| Premiums | Guaranteed Level for the length of the Term | Flexible | Guaranteed Level for Life |
Let’s step into the 6 different kinds…
6 Different Kinds of Life Insurance Policies
To really know and understand which type of life insurance policy is best for you, we need to find out your needs first. Once we know your needs, then we can choose the type of life insurance that best suits that specific need and then narrow down the best kind of life insurance policy for you.
This will also help you choose the best life insurance companies to apply with since some life insurance companies are better for Term policies and others are best for permanent policies. I will explain more…
The need…
I will start by going over the different needs for life insurance and then we will match those needs to a type of life insurance policy.
We need to start by asking ourselves:
- How Long do I need the coverage?
- What is the purpose of the coverage
- What is my budget
Knowing if you need to replace an income, cover a mortgage, or collaterally assign for an SBA loan will determine what type of life insurance policy you will need.
Let’s not forget about the duration. Do you need a short term policy or a permanent policy?
And finally, your health matters too.
Understanding the Different Kinds of Life Insurance Policies
1. Term Life Insurance
A term life insurance policy is one of the least expensive types of life insurance policies in the industry. This kind of coverage is what most people will need and want.
It is NO accident that this plan is the most common amongst families…
How it works: You have to make only two decisions if you buy term life insurance: what amount you want and how long you want the coverage to last.
The length of the term can be as little as a year or as many as 40, but whichever you choose, it’s the time period in which the life insurance company cannot change your premiums as long as you maintain your premiums and keep your policy in force (current).
- Pros: The most affordable type of life insurance and easy to understand. You can compare free term life insurance quotes here!
- Cons: your payment will increase after the term length is up and could end up paying more for coverage in the future if you need another policy.
You can also add additional riders to your term policy, which adds different benefits, like the ability to be converted to a permanent policy (regardless of insurability) or a Return of Premium rider that will allow you to receive all the premiums paid into the policy at the end of the term.
2. Guaranteed Universal Life
A Guaranteed Universal Life Insurance Policy (GUL) is perfect for people who are wanting a level premium and level death benefit for a longer period than a term life insurance policy.
This type of policy allows you to choose a specific age that you want your coverage to last till. All while maintaining the same payment and death benefit through the life of the policy… GUARANTEED!
The cheapest way to get permanent coverage is with a GUL.
How it works: This plan guarantees a certain death benefit to any age from 85 to 121 based on your need. There’s typically little or no cash value within the policy.
- Pros: it’s the least expensive type of permanent life insurance policy and you can choose the age to which you want the death benefit guaranteed, such as 85, 90, 95, 100, 105, 110, 115 and 121.
- Cons: The policy may have little or no cash value.
Guaranteed Universal life insurance policies are some of the best life insurance plans for seniors who are looking to get the most bang for their buck.
3. Index Universal Life Insurance
An Index Universal Life (IUL) Insurance policy is a GOOD tool to accomplish specific financial goals if used and structured properly by the agent. This type of life insurance policy is one of the more complicated plans, and should only be purchased if the contract is completely understood by the consumer.
How it works: It is similar to a GUL. It provides permanent coverage but is more focused on cash accumulation. The cash mirrors the stock market indexes like the Standard & Poor’s 500 in an attempt to leverage market gains for additional growth.
- Pros: You have access to the cash value, which grows over time. The cash value is linked to a stock market index, so if the stock market goes up, you get some upside, but if it goes down… floors are built in to stop any downside of a bad market.
- Cons: Your cash value doesn’t take full advantage of stock market gains. If NOT structured correctly, the fees in your policy can end up causing your policy to lapse!
One Thing to always ask your insurance advisor before stepping into one of these plans for the purpose of cash accumulation… “SHOW ME THE FEES“
4. Whole Life insurance
A whole life insurance policy is a type of permanent life insurance (also called cash value life insurance), which is a kind of two types of life insurance. (The second major type is term life insurance).
How it works: Whole life insurance doesn’t expire. As long as you make the payments. Your payments stay the same, you get a guaranteed rate of return on the “cash value” investment component of the policy.
- Pros: It covers you for your entire life. Your payment and death benefit are guaranteed.
- Cons: It’s the most expensive kind of life insurance.