So many types of life insurance, which one is best for me?
Types of Life Insurance
What type of life insurance is best for you? That depends on so many factors; How long do you want the policy to last, how much do you want to pay, and do you want to use the policy as an investment vehicle?
Common types of life insurance include:
Simplified issue life insurance.
Guaranteed issue life insurance.
All types of life insurance fall under two main categories:
How Term Life Insurance works:
Term life insurance is typically sold in lengths of one, five, 10, 15, 20, 25 or 30 years, you pick which covers your specific needs. You can usually get a policy with a benefit amount of 100,000.00 all the way up into the multi-millions.
“Level premium” term life insurance locks in the same price for the length of the policy. Think of it like this, remember the older you get the more expensive life insurance is. So with the level premium the insurance company takes the cost of insurance for each year and averages it out over the life of the policy and that will be your monthly premium. This allows you to keep your premium the same every month for the life of your policy.
“Annual renewable” term life is a one-year policy that renews every year. Annual policies can be useful if you have short-term debts or need coverage for a brief period of time.
Pros: It’s often the cheapest life insurance, and it's sufficient for most people.
Cons: If you outlive your policy (the term you set when you got the policy ie; 1, 5, 10, 20, or 30 years), your beneficiaries won’t receive anything.
How Whole Life Insurance Works;
Whole life insurance is a permanent type of life insurance. It typically lasts until you die, as long as you pay the premiums. In general, your premiums stay the same, you get a guaranteed rate of return on the policy’s cash value, and the death benefit amount doesn’t change.
Pros: It covers you for your entire life and builds cash value.
Cons: It’s typically more expensive than term life, so if you're looking for affordable life insurance, you might want to explore other options.
How Universal life insurance works;
Universal life insurance's death benefit is guaranteed and your premiums won’t change. There’s typically little to no cash value within the policy, and insurers demand on-time payments. You can choose the age to which you want the death benefit guaranteed, such as 95 or 100.
Pros: Due to the minimal cash value, it’s cheaper than whole life and other forms of permanent life insurance.
Cons: Missing a payment could mean you forfeit the policy. And since there’s no cash value in the policy, you’d walk away with nothing.
How Indexed universal life insurance works:
Indexed universal life insurance links the policy's cash value component to a stock market index like the S&P 500. Your gains are determined by a formula, which is outlined in the policy.
Pros: You can access cash value, which grows over time. And you may see considerable gains if the stock market performs well. Within limits, your payments and death benefit amount are flexible.
Cons: Due to investment caps within the policy, the cash value doesn’t take full advantage of stock market gains. Plus, these policies are often more work than a term or whole life product, as the investments require monitoring.
Participation rate: The policy will dictate how much your cash value “participates” in any gains. For example, if your participation rate is 80% and the S&P 500 goes up 10%, you get an 8% return. If the index
goes down, you won’t lose cash value; you’ll just get a zero rate of return. Some policies offer a small guaranteed interest rate in case the market goes down.
Cap on gains: Your cash value gains are subject to a cap. So if the index goes up 20% and your cap is 10%, you'll get only a 10% return.
Death benefit and flexible premiums: Some policies let you adjust your death benefit as your family’s needs change. Within limits, you can also decrease your premiums or skip a payment, as long as your cash value covers the costs. If you’re skipping payments and you don’t have enough cash value to cover the costs, your policy could lapse.
How Variable and variable universal life insurance works:
The cash value in variable life and variable universal life insurance is tied to investment accounts, such as bonds and mutual funds. Variable life insurance premiums are typically fixed and the death benefit is guaranteed, regardless of how the market fares. In contrast, variable universal life insurance premiums are adjustable, and the death benefit is not guaranteed. If you’re considering a policy like this, a fee-only financial advisor — a planner who doesn’t earn commissions based on product sales — can help you select the best one.
Pros: There is potential for considerable gains if your investment choices do well. You can take partial withdrawals from the cash value or borrow against it.
Cons: It requires you to be hands-on in managing your policy as the cash value can change daily based on the market. Fees and administrative charges are deducted from your payment before going toward the cash value.
Once you have decided on the type of policy and the amount of coverage that will best fit your needs. You need to submit an application for underwriting to review and offer you an official quote/policy.
The term “underwriting” refers to how a life insurance company calculates the risks of insuring you. Therefore, the policy’s underwriting determines how much you’ll pay.
There are three main types of life insurance underwriting:
Fully underwritten life insurance If you're healthy, fully underwritten policies will generally be the cheapest option. This is because the application process typically includes a medical exam and questions about your health, as well as questions about your family’s health history, your hobbies, and your travel plans. Insurers use this data to price the policy more accurately based on your specific life expectancy.
Simplified issue life insurance Simplified issue policies don’t require you to take a medical exam. However, you may be asked a few health questions and could be turned down based on your answers. Instant-approval life insurance policies use quick, online health questionnaires, as well as algorithms and big data to speed up the application process.
Guaranteed issue life insurance Guaranteed issue life insurance requires no medical exams and no health questions. In short, you can’t be turned down for coverage if you’re within the eligible age range, which is typically 40 to 85. However, this is an expensive way to buy life insurance, and coverage amounts are generally low usually between $1,000.00-$25,000.00. In addition, these policies have graded death benefits, which means if you die within the first few years of having the policy, your beneficiaries may receive only a partial payout. People often buy this type of life insurance if they’ve been turned down elsewhere due to their health but they want to cover final expenses, such as funeral costs.
Other types of life insurance:
Group life insurance is typically offered by employers as part of the company’s workplace benefits. Premiums are based on the group as a whole, rather than each individual. In general, employers offer basic coverage for free, with the option to purchase supplemental life insurance if you need more coverage. The premium gets more expensive the older you get and when you leave your company you usually lose the coverage. Forcing you to purchase an individual plan at a much higher premium because you are now older than when you first got the group life insurance. Having group life insurance is great as a secondary policy but it would behoove you to have an individual policy outside of work.
Mortgage life insurance covers the current balance of your mortgage and pays out to the lender, not your family if you die.
Credit life insurance pays the balance of a specific loan, like a home equity loan. Your bank might offer to sell you a credit life insurance policy when you take out a loan. If you die, it pays off the lender, not your family.
Accidental death and dismemberment insurance covers you if you die in an accident, such as a car crash. Think planes, trains and automobiles. AD&D insurance can also payout for the loss of limbs, as well as the loss of your sight or hearing.
Joint life insurance insures two lives, usually those of spouses, under one policy: First-to-die: Pays out after the first policyholder dies. The policy would then expire; it doesn’t continue to cover the second person. These policies are extremely rare as the demand for them is low.
Second-to-die: Pays out after both policyholders die. These policies can be used to cover estate taxes or the care of a dependent after both policyholders die.
Well, I hope that helped give you an idea of the different types of life insurance. I you can't decide which is best for you right now or can't afford the permanent policy that you want. Get a Term policy for now while you are making up your mind, this will protect your family or beneficiaries while you are planning. Most carriers will also let you convert the term policy to a permanent policy later down the road. Just remember the younger you are the cheaper life insurance is. Click on the Life Tab above and you can obtain immediate online quotes from a number of carriers. Once you have picked a policy and carrier that fits your needs you can apply directly from the quote.
