Life insurance is a household staple in the U.S., with around 54% of adults having life insurance policies. Life insurance is a contract between the insurance provider and you that ensures your family’s financial stability if you pass away unexpectedly.
It’s essential to consider the life insurance coverage you select because this insurance policy will determine your loved ones’ future after you die. The first step in picking the right life insurance coverage is understanding the many types of life insurance available.
Today’s article is a complete overview of the types of life insurance policies available for you to consider. It should enable you to make a better-educated selection the next time you’re in the market for life insurance. Let’s get started right now.
What Are the Various Categories of Life Insurance?
Before we go into the types of life insurance policies, let’s look at the different categories of these policies. All forms of life insurance are divided into four major categories, which are as follows:
1. Term Life Insurance
Term life is the most popular and widespread type of life insurance. It also has the most straightforward terms in comparison with other policies. A term life insurance policy will pay your beneficiaries a fixed sum of money if you pass away.
However, a term life insurance policy only insures you for a set length of time. If you die beyond this time, your beneficiaries will get nothing. That’s rightâ€”no death means no compensation, even if you spent a lot of money on premiums.
Term life insurance is simply a payment to the insurance provider to protect your beneficiaries in the event of your untimely death. Life insurance policies might have terms of 10, 15, 20, 30, or even more years. You’ll pay a premium to the insurance provider for the specified period, and your family will get a death benefit if you pass away during that time frame.
2. Permanent Life Insurance
Another major category is permanent life insurance. In contrast to term life insurance, you will be required to pay premiums during your whole life. The policy will be enforced until your death or cease paying your premiums, whichever comes first.
Permanent life insurance is pricier than term life insurance. Your premium amount remains constant during the policy’s duration. If you die, your beneficiaries will also get a fixed death benefit.
Permanent life insurance policies also have a cash value, implying that a portion of your premium is tax-deferred and accumulates with interest into a lump sum payout that your beneficiaries get when individuals die.
3. Level Term Insurance Policy
A level term policy protects your beneficiaries for a certain period like term life insurance. However, even if you die, the premiums and payout amount remain the same with level term insurance and is excellent for long-term contracts since the coverage rises while the premium costs remain constant.
It’s worth mentioning that premiums for term life insurance policies rise with age. However, level term insurance policies have greater rates than term life insurance policies. Do the math to see which alternative is best for you.
4. Yearly Renewable Term Policy
There are no term limits on these life insurance policies. However, it would be best to renew the policy each year, making it a more inexpensive alternative, but it may become more expensive further along the road.
The Types of Life Insurance
With that out of the way, let’s look at the types of life insurance accessible to you. The various kinds of life insurance are:
Universal Life Insurance
Like permanent life insurance policies, universal life insurance plans have a cash value. However, universal life insurance policies are more flexible than permanent policies due to adjustable premium payments. It implies that you may utilize some of your accumulated cash value to reduce your premium.
In fact, if you’ve acquired a significant cash value, you may be able to eliminate the premium payments. However, there is a cost to paying a lesser or no premium. It entails sacrificing your monetary worth, which means your beneficiaries don’t receive as much in benefits as they should.
Depending on how you look at it, universal life insurance can serve as a long-term investment plan. Part of your premium goes into your coverage, while the other serves as your savings. This makes perfect logic, but it may not be the best long-term investment alternative.
This is because your insurer may levy significant management fees that lower your cash value. Furthermore, with the yearly renewal term, the majority of your premium payments will be used to pay for the insurance rather than your “savings.”
With this in mind, it’s worth mentioning that universal life insurance plans are classified into three types:
i. Guaranteed Universal Life Insurance: The premiums for this life insurance are fixed. This sort of coverage also doesn’t come with cash value. It would help if you chose the age at which you wish the insurer to guarantee the death benefit payment.
ii. Indexed Universal Life Insurance: This policy has a cash value, but the insurer ties it to a stock market index. Depending on the success of the index, the cash value may increase. The policy will specify how much your cash value can grow using a certain methodology.
iii. Variable Universal Life Insurance: The cash value of variable universal life insurance is tied to specific investment accounts. They can take the form of stocks, bonds, or mutual funds. The premiums can be adjusted, but there is no death benefit guarantee.
Variable Life Insurance
This is not the same as variable universal life insurance. Contrary to the latter, variable life insurance has set premiums but is still linked to an investment, usually a mutual fund. You can gain a lot of money depending on market conditions, but you can also lose a lot of money.
This type of life insurance appears to be an excellent investment alternative, but it has certain drawbacks. For example, you can only invest your cash value in the investment option offered by the insurance. This prevents you from pursuing other, more promising possibilities.
This policy is also a little riskier than the other options. This is because there are too many variables in your cash value “investment” that could go either way. You might either make a fortune or lose everything.
Types of Underwritten Life Insurance Policies
Underwriting in insurance refers to the process through which an insurer determines how much risk they’re prepared to accept and how much they’ll charge. Underwritten insurance plans are those in which the insurers will underwrite the amount you will pay for the coverage. The following are some of the most popular forms of underwritten life insurance plans.
Fully Underwritten Life Insurance
This is one of the most affordable life insurance options for healthy people. A complete medical exam is required as part of the application process for this coverage. It also comprises a thorough examination of your family’s medical history, hobbies, and travel activity.
The insurer will charge you for the coverage based on your health status and your family’s health history. The higher your chance of death, the more you’ll have to pay the insurance provider.
Simplified Issue Life Insurance
You don’t need a medical checkup for this form of life insurance during the application process. However, your insurer may ask you a few health-related questions. The answers you provide to these questions will influence whether or not the insurer will approve you for coverage.
The application process is far less complicated than that of a fully underwritten life insurance policy. Instant-approval life insurance, for example, uses big data, algorithms, and artificial intelligence for applications’ acceptance/rejection. It also tells you how much your insurance coverage costs in no time.
Simplified issue life insurance is a common alternative for the majority of people. However, it is worth mentioning that the coverage has a larger premium than other policies. Furthermore, its coverage is somewhat limited compared to other forms of life insurance.
Guaranteed Issue Life Insurance
As the name implies, this type of life insurance is guaranteed by insurers. That means you won’t have to worry about any medical exams, health inquiries, or anything similar. You’re eligible for coverage if you are within the age range.
This is an excellent choice for most people because there is almost no chance of rejection. However, the policy has a few drawbacks. One of them is that the procedure is a little more expensive than the others.
Additionally, the coverage is quite limited compared to the premium amount paid. Also, if you pass away within the first several years of coverage, your beneficiaries will only get partial death benefits.
Other Types of Life Insurance
Aside from the ones mentioned above, there are a few additional types of life insurance plans to consider. Among these policies are:
Final Expense Insurance
Final expense insurance, often known as burial expense insurance, is one of the most affordable types of life insurance. It is a form of mini life insurance coverage that is extremely simple to qualify for. Because it’s the same as any other whole life insurance policy, the name “last expense insurance” may be a marketing ploy.
The sole distinction between this policy and others is the amount of the premium and benefit. The death benefits should ideally pay burial expenditures; however, the beneficiaries can use the money for any purpose. The insurance is excellent for addressing minor costs, but it doesn’t provide long-term financial stability to your beneficiaries.
Joint Life Insurance
Joint life insurance, often known as first-to-die insurance, is a form of life insurance for couples. For the price of a single insurance plan, the coverage covers both you and your spouse. The surviving spouse gets a death benefit if the other one passes away, thus the “first-to-die” tag.
For most couples, joint life insurance makes a lot of sense since it provides much-needed protection to the surviving spouse. However, there is a minor flaw with this life insurance policy. It doesn’t account for a couple’s income disparity.
That’s rightâ€”joint life insurance has a one-size-fits-all approach for couples’ wages. That implies you’ll have to spend a lot of money in premiums even if one of you makes minimum wage. Remember that the goal of life insurance is to replace one spouse’s earnings if they die.
You might discover that getting separate life insurance plans makes far more financial sense when you do the math. However, this depends on your specific situation.
Survivorship Life Insurance
Survivance or second-to-die life insurance is a policy that covers spouses in the same way as joint-life insurance does. However, in contrast to joint life insurance, the insurance provider only pays out death benefits once both spouses have died. It’s far more practical and cost-effective than purchasing individual insurance coverage for each spouse.
Survivorship has a cash value that may be used as an investment. It may also be customized with riders to match your specific needs.
Is Life Insurance Worth It?
There’s always the question of whether it’s a smart idea to purchase life insurance. The answer is definitely yes. Life insurance is an excellent way to secure the financial stability of your loved ones in the event of your unexpected death.
However, whether or not life insurance is worthwhile depends on your own situation. There’s no need for life insurance if you don’t have someone depending on you. The same is true for parents whose kids are fully grown and capable of caring for themselves.
That being said, your life insurance coverage is only valuable if you choose the right one. Buying the right insurance will influence whether your death benefits will secure the future of your beneficiaries.
Choose the Right Policy for Your Loved Ones
Now that you’ve learned about the types of insurance plans, it’s up to you to choose the best one for your needs. Consider all the benefits and drawbacks of each plan before deciding on one that’s right for you. Your decision will affect the future of your loved ones.
Email: [email protected]
I grew up in Dubuque, Iowa, where I learned the concepts of hard work and the value of a dollar. I spent years in Boy Scouts and achieved the honor of Eagle Scout. I graduated from Iowa State University and moved to Chicago and spent a few years managing restaurants. I then started working in financial services and insurance helping families prepare for the high cost of college for their children. After spending years in the insurance industry, I moved to Arizona and started working with Federal Employees offing education and options on their benefits. I became a Financial Advisor / Fiduciary to further help people properly plan for the future. I enjoy cooking and traveling in my free time.
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