Below, we discuss the eight most common types of life insurance, as well as the different types of underwriting when it comes to life insurance. Do note that there isn’t one “best” type of life insurance for everyone, because everyone has unique circumstances, but you will most likely fit into one of these categories.
Quick Article Guide:
- Life Insurance Definitions
- Term Life Insurance
- Permanent Life Insurance
- Whole Life Insurance
- Guaranteed Universal Life Insurance
- Indexed Universal Life Insurance
- Variable Universal Life Insurance
- Guaranteed Issue Life Insurance
- Simplified Issue Life Insurance
- Accidental Death Insurance
- Life Insurance Underwriting
- Questions? We Can Help!
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When it comes to buying life insurance, the same type of policy can mean different things with different companies. That’s why it’s important to not only make sure you research the type of life insurance policy, but research the company as well. Most companies have “niches”, or specific categories that they’re more lenient with on underwriting.
The first step is to figure out what you need life insurance for. Is it only for a specific period of time? Term life insurance might be the way to go. Or maybe you are looking for a more permanent solution – whole or universal would be a better option in that case. Once you figure out your need for coverage, then you can compare companies and decide which company is going to give you the best rate for your situation. But before we get into the different types of life insurance, let’s review the basic life insurance definitions.
Insured: The person covered by a life insurance policy.
Insurer: The life insurance company providing the policy. Also known as the carrier or provider.
Insurance Policy: The written document issued by a life insurance company to the policy owner. This represents the written contract between the company and policy owner.
Owner: This person enters into the contract with the life insurance company for coverage.
Beneficiary: A person(s) designated by the policy owner to receive the life insurance policy proceeds after the death of the insured.
Death Benefit: The dollar amount of coverage of a life insurance policy paid to the beneficiary/beneficiaries upon the insured’s death. You can choose to receive this as a lump sum, annual payments, or monthly payments.
Cash Value: The amount of cash accumulated in some permanent life insurance policies. It generally grows over time and can earn a rate of interest (depending on the policy). The insured can borrow cash value to pay for premiums, or withdraw it when the policy is surrendered.
Rider: An endorsement that can be added to an insurance policy to modify it, including or excluding coverage. Some are added with no charge, and others cost a fee to be added.
These definitions should help cover the basics, so let’s move onto the two major types of life insurance, shall we?
The Two Main Types of Life Insurance
Term Life Insurance is the first of the two major types. It is a policy that is in effect for – you guessed it – a term, or a certain period of time. It provides death benefit protection for 10, 15, 20, 25, or 30 years (depending on the company and what you choose).
In addition, most term life policies will allow the owner to renew it until age 95. However, it is important to note that renewals typically come with an increase in monthly premiums. The amount it increases depends on the company – some increase the premiums only a little, while others may increase them a lot. If they don’t increase the premiums, they will most likely decrease the policy’s death benefit (this is called decreasing term life insurance).
While decreasing term life insurance lessens the death benefits over time with a fixed premium, level term life insurance offers both fixed premiums and a fixed death benefit during the term. However, there is a sector of level term life that offers a fixed death benefit, but increases the premium every 5 years, so make sure you know which type of term life you’re applying for!
The nice thing about term life insurance is that most companies have a conversion rider that you can add, meaning that you will have the option to convert your policy to permanent coverage later on in life without having to retake a medical exam. Yes, the premium will be more costly, but they will base it off of the rate class you originally qualified for with the term policy rather than basing it off of your current health status (a nice perk!). So if your health has declined at all by the time you want to convert (which is very possible), you’ll most likely still get a good deal and have life insurance for the rest of your life!
Some basics of term life insurance:
Typical term lengths: 10, 15, 20, and 30 year terms. 1 (annual renewable term/ART), 5 and 25 year terms are also sometimes available, but are not as common.
Cost: Most affordable option when it comes to life insurance. Term life is generally cheaper than permanent coverage. Prices will vary in between companies, so again, we stress the importance of making sure you find a good fit for you. With over 50 years of experience collectively, JRC can help you with this.
Popular riders available: Waiver of Premium, Conversion Option, Accelerated Death Benefit, Accidental Death Benefit, Return of Premium, etc.
Like mentioned above, term life insurance is most likely going to be your most affordable option. It’s always best to “test the waters” first and purchase a term policy, rather than jumping in the deep end with a permanent policy, only to find out later on that you don’t need it. It is still a case by case decision though, and some individuals might be better off purchasing permanent coverage right off the bat. That’s why it’s important to speak with an unbiased, licensed agent so they can best understand your needs and provide you with the correct policy options.
The other main life insurance option is Permanent Life Insurance. This type of coverage is exactly what it sounds like – permanent; the policy is in effect until you pass away. With permanent coverage, you have a few different options, including:
- Whole life insurance
- Universal life insurance
- Variable universal life insurance
- Survivorship life insurance
This type of permanent policy has fixed premiums as well as a cash value component that accumulates over time. Since it is permanent, it provides death benefit protection for the entirety of your life. Like we mentioned earlier, permanent policies are more expensive, so whole life is going to cost significantly more than term life would. Since whole life has a cash value component, you do have the option to use some of that to pay for premiums if need be. It isn’t recommended however, because that only lessens your cash value, and if you don’t pay it back, the money is deducted from your death benefit.
Something that can be added to a whole life policy is called Long Term Care (LTC) insurance. This type of insurance is for individuals who cannot perform at least 2 of the 6 activities of daily living (ADLs). It provides a monthly income benefit to help cover the expenses of assisted living.
What is whole life good for?
If you are a high-income individual who has maxed out your 401(k) plans, Roth IRAs, and 529 plans and want to have a saving strategy with the benefit of life insurance.
What is whole life not good for?
Anyone else who isn’t in a high tax bracket and isn’t risk-averse. We don’t typically recommend whole life, as there are much better permanent life alternatives. Dave Ramsey himself called whole life insurance “one of the worst financial products available.”
Universal Life Insurance
Also known as “No Lapse” or “Secondary Guarantee Universal Life”, this policy type issues fixed rates until a certain age (such as 90, 95, 100, 105, 110, or 121) rather than a specific number of years.
It is more affordable than whole life insurance, but still a little bit more expensive than term life (since it is a longer policy).
It doesn’t accumulate cash value like whole life does, but does provide guaranteed fixed premiums and a guaranteed death benefit. It also offers policies to certain individuals without having to take a medical exam.
It’s a good affordable option for people who want permanent life insurance coverage, for estate planning, or to fund an irrevocable life insurance trust (ILIT).
This subcategory of universal life insurance offers tax-deferred cash accumulation while maintaining a death benefit, allowing the policyowner to allocate the cash value amounts to either a fixed or equity index account.
This could be a good option for business owners to use IUL as key person insurance, for premium financing plans, or for estate planning. It is more advanced, so it can be more difficult to understand.
Variable universal life insurance offers both a death benefit as well as an investment feature. As cash value accumulates in VUL, the policyowner has a choice of investing it into various accounts (similar to mutual funds). This can provide exposure to stocks and funds, creating a possibility of an increased rate of return in comparison to other permanent policies.
As a universal policy, VUL allows flexibility on premium payments – you have the option to pay nothing one month up to the maximum amount allowed by the Internal Revenue Code for life insurance. Do note though that you must still pay a certain amount each year to keep your policy in effect.
While this type of policy is typically not a forefront option for people, it can be a beneficial policy for those who don’t qualify for other types of coverage. So what is guaranteed issue life insurance?
It is a type of life insurance policy that has to be issued to you by the life insurance company as long as you pay your premiums. No medical exam or questions required, all the company typically asks you for is your age.
Since guaranteed issue is so easy to obtain, the premiums are much higher than all other types of coverage. That’s why it’s important to speak with an independent agency like JRC to make sure you’ve exhausted all other options before turning to guaranteed issue.
It is also important to mention that guaranteed issue has a two-year waiting period. This means that if you die within two years of purchasing this policy (other than as a result of an accident), you will only be refunded your premiums, not the full death benefit.
Speaking of death benefits, this type of policy only issues smaller amounts – typically between $5,000 and $50,000 depending on the carrier.
If you are between the ages of 50 and 80, are facing major health risks, really need life insurance and have exhausted all other options, this might be a good fit for you.
In short, simplified issue life insurance is another term for a no medical exam policy. Unlike some other policies, this one does not require you to undergo a medical exam to receive coverage. All you need is to answer a health questionnaire and allow the life insurance company to check the Medical Information Bureau (MIB) for your health records, and you’ll be on your way to getting insured!
Since this type of policy forgoes the medical exam, it will be more expensive than other policies that require you to take one. If you are in a state of health that would increase your premiums after taking a medical exam, though, this could be a better option. The wait time will also be lessened due to the waive of the medical exam.
Accidental death insurance is an policy that pays benefits to the beneficiary/beneficiaries if the insured’s cause of death was due to an accident. This means that it will not cover things such as cancer, a heart attack, stroke, or any reckless activities (skydiving, bungee jumping, etc.).
It is important to note that this is not actually life insurance. It can, however, be added as a rider to life insurance policies. We don’t recommend using this insurance as your only form of coverage, as it will not be as advantageous as purchasing an actual life insurance policy.
There are three different ways that underwriting can occur: fully underwritten, through accelerated underwriting, or via no medical exam.
Fully Underwritten Life Insurance
These types of policies require taking a medical exam. During a medical exam, a medical examiner comes to your office or home (or you can visit them if you wish), where he or she will take your height and weight, as well as a urine and blood sample. The whole process typically takes less than 30 minutes.
Once your lab results come back, the life insurance company you applied with will offer you a policy and premiums based on those results and some other factors (like family history, hobbies, etc.). If the company deems necessary, they can request a physician’s statement before offering you a policy.
The whole process generally takes about 2-4 weeks if you are a healthy individual, although some companies process as fast as 48 hours. If you are maybe not-so-healthy, the process can take a little longer – about 4-8 weeks.
If you are healthy and decide to take a medical exam, this could significantly lower your premiums. So definitely take it into consideration if applicable.
Accelerated underwriting is the middle ground between fully underwritten and no medical exam policies. It is much faster than fully underwritten policies, usually taking a week or two – sometimes even just a few days.
Companies accomplish this faster process by using readily available data instead of using medical records and exam results. Typically, you’ll have an initial medical interview over the phone, forgo a medical exam if you’re in good health, or be asked for a round of lab tests (which is still faster than the traditional medical exam), then you’ll get your results and offer!
No Medical Exam
We’ve discussed this a bit above, so we won’t spend too much time on it. Essentially, a no medical exam policy is one in which you don’t have to take a health exam to be offered a policy. This is good for those who may not have the best health, and these policies are becoming increasingly more popular – in turn, making them more affordable.
With such a large amount of options, it can be expected to be a little confused on which policy is best for you. At JRC Insurance Group, our agents do not have sales quotas to meet, they’re just genuine people who want to match you with the best life insurance company possible. We work with over 45 top-rated companies, and have no doubt that we can find a company for you.
If you would like to receive an accurate quote based on your age and health, as well as which type of policy and amount of coverage you should choose, give us a call. Toll-free, no obligations: (855) 247-9555.
Our services are completely free, and there is not cost to apply for coverage. Give us a call today, or you can request a free online quote below to compare rates from more than 45 life insurance companies in less than a minute.