Although life insurance policies can be divided up along general lines into the categories of term and permanent varieties, there are actually a wide array of different types of life insurance policies. It can be difficult for consumers who aren’t in the know to figure out which policy is best for them. This article will lay out the basics of each policy to make that choice a little bit easier.
Term Life Insurance
Term life insurance is what’s known as a “pure” insurance policy. That just means customers pay a premium and that premium contributes to a death benefit that will be distributed upon death. There are a variety of ways that the benefit can be paid out but most consumers choose a lump sum.
The primary benefit of term insurance policies is that they are less expensive than most of their alternatives. They typically cost somewhere between $30 and $40 per month for young, healthy people. Term life insurance may be less practical for older consumers.
Whole Life Insurance
These policies differ from term life insurance policies in that they have a cash value in addition to a death benefit. As policyholders pay their premiums, part of those premiums funds the cash value. The policy then lasts for as long as the policyholder continues making premium payments.
Unlike term life policies, whole life policies can be quite complex. This is largely due to the cash value component, which comes along with surrender fees, taxes, interest, and a variety of other stipulations. Whole life policies also tend to be as much as ten times as expensive as term life policies.
Permanent Life Insurance
The phrase “permanent life insurance” actually refers to several different types of life insurance. What they all have in common is that they will remain valid as long as policyholders pay their premiums and that all of them have cash value components.
Universal Life Insurance
This is a type of permanent life insurance policy. The primary difference between universal and whole life insurance is that policyholders with this type of policy can change their benefit amounts and the premiums that fund them without having to take out entirely new policies. Policyholders can also skip payments if they have enough cash value to cover them, making universal life insurance comparatively flexible, though the shifting benefits and premiums can also be comparatively confusing and expensive.
Variable Life Insurance
With a variable life insurance policy, which is also a type of permanent policy, the cash value of the policy is held in a series of sub-accounts that function like mutual funds. Variable life insurance policies are thus riskier than the alternatives described above. They can wind up paying out more but they can also wind up leading to substantial losses.
Variable Universal Life Insurance
As the name implies, this type of policy combines some of the features of variable life insurance with other features from universal life policies. Policyholders with this type of policy can adjust their premiums and death benefit amounts as they would be able to with universal life insurance policies. However, the cash value is invested via sub-accounts, as it would be with a variable life policy.
Simplified Issue Life Insurance
Simplified issue life insurance policies don’t require a medical exam. This no-exam policy is what makes getting the policy simpler, explaining the name. Applicants will still have to complete health questionnaires, though, and those who report too many health issues may still have to take exams or be flat-out denied.
Along with a simplified application process, the lack of medical exam also confers some drawbacks, though. For one thing, this type of policy is often more expensive. Most insurance companies will offer free quotes, though, so it’s still worth looking into simplified issue life insurance policies.
Guaranteed Issue Life Insurance
Similar to simplified issue life insurance policies, guaranteed issue policies allow applicants to forgo medical exams. It goes one step further, though. Applicants don’t even have to answer health questionnaires prior to being approved.
Basically, if policyholders can pay their premiums, they can get insurance. Many of those who take out guaranteed issue life insurance policies are older or have health conditions that prohibit them from getting other types of insurance. As a result, most policyholders will pay a good deal for their policies.
Final Expense Insurance
This type of policy is specifically designed to pay for end-of-life costs. It will cover the cost of just about anything associated with the policyholder’s death, including medical costs and funerals. In most cases, it is actually a simplified issue policy, though it is also possible to get guaranteed issue policies if applicants are unable to pass the health exam.
Group Life Insurance
Although this isn’t technically a type of life insurance, it’s worth mentioning group life insurance. This type of policy is provided through an employer. Keep in mind that most of the time, these policies are not as comprehensive as the private issue policies described above.