The 8 Major Types of Life Insurance Policies
With so many life insurance policies to choose from, how are you supposed to know which type is right for you?
That’s why we created this ultimate guide to life insurance.
We've explained the eight most common types of life insurance, as well as the approval process for each type of policy.
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. If you're not sure where to begin, we can help. Our agency represents 63 top-rated life insurance providers and our comparative shopping service is free.
Here’s what we'll cover in this post:
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Here’s what we'll cover in this post:
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.
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 basic types of life insurance, shall we?
The Two Main Types of Life Insurance
1. Term Life Insurance
Term Life Insurance is the least expensive type of life insurance available. It provides a set amount of coverage for a fixed period of time or a "term." During your term, the life insurance policy cannot increase your rates or decrease your coverage, regardless of any changes to your heath. The most common terms are 10, 15, 20, 25, and 30 years (depending on the company and what you choose).
A term life insurance policy is ideal for most breadwinners that need coverage for a fixed amount of time. Most policyholders base their term around the number of years left on their mortgage, the age they expect their children to become self-sufficient, or the age they plan to retire. Most people's need for life insurance diminishes after these life events, but if you still need coverage, most term life policies also offer a conversion option.
If your policy offers a conversion rider, you will have the option to convert up to the full value of your policy into permanent coverage before your term expires. What's nice about this option is that it allows you to convert a small amount of coverage for final expenses without having to retake a medical exam or prove your health. The insurance company will base your cost off of the rate class that you were initially approved for.
Some providers also offer annually-renewable term, but this can become extremely costly after a few years, and isn't advisable for anyone still in insureable health. The amount it increases depends on the company - some increase the premiums only a little, while others may increase them a lot. Your age also plays a big role. If they don’t increase the premiums, they'll decrease the policy’s death benefit instead (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. It's also important to be weary of policies that offer a fixed death benefit, but increase in price every 5 years, so make sure you know which type of term life you’re applying for, and avoid purchasing policies from re-marketers like banks or credit unions.
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 your needs and health profile.
Popular riders available: Waiver of Premium, Conversion Option, Accelerated Death Benefit, Accidental Death Benefit, Return of Premium, Long Term Care, etc.
Most financial experts recommend term life insurance because it provides the most coverage for the least amount of money. It is still a case by case decision though, and some individuals might be better off purchasing permanent coverage. This is why it’s important to speak with an unbiased, licensed life insurance agent so they can best understand your needs and provide you with the correct policy options.
Permanent Life Insurance
If your life insurance policy isn't a term, its probably some form of Permanent Life Insurance. This type of coverage is exactly what it sounds like - permanent; the policy is designed to stay in effect until you pass away. There are many forms of permanent coverage, some of the different options include:
2. Whole Life Insurance
This type of permanent policy offers level premiums and a fixed death benefit for your lifetime. Most whole life insurance policies also offer a as well as a cash value component that slowly accumulates over time.
Permanent policies are designed to provide a death benefit, so whole life insurance will cost significantly more than term life would for an equal amount of coverage. Most whole life polices provide $50,000 in coverage, or less, which also keeps the cost down.
Since whole life has a cash value component, you'll have the option to use some of that to pay for premiums if need be. However, most whole life insurance policies do not have a sizeable cash value for at least a few decades.
3. Universal Life Insurance
Another sector of permanent life insurance consists of Universal Life Insurance. Within this category is Guaranteed Universal Life, Indexed Universal Life, and Variable Universal Life.
4. Guaranteed Universal Life (GUL)
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 designed to be a permanent policy).
Guaranteed Universal Life insurance doesn’t accumulate a cash value like traditional universal life, but it offers level rates and a fixed death benefit without the investment risk. Its a the best option for anyone that needs permanent life insurance to fund a trust or preserve an estate.
5. Indexed Universal Life (IUL)
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.
Who is Indexed Universal 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.
Who is Indexed Universal Life not good for?
Anyone else who isn’t in a high tax bracket and isn’t risk-averse. We don’t typically recommend indexed universal life, as there are much better permanent life alternatives.
Dave Ramsey himself called indexed universal life insurance “one of the worst financial products available.” Forbes and Wall Street Journal haven't been too friendly to IULs either, and in 2015, New York state's department of insurance warned consumers about the product's often overstated benefits.
6. Variable Universal Life (VUL)
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.
7. Guaranteed Issue Life Insurance
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 and gender.
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 $25,000 depending on the carrier. If you are between the ages of 50 and 85, are facing major health risks, really need life insurance and have exhausted all other options, this might be a good fit for you.
8. Simplified Issue Life Insurance
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.
Bonus: Accidental Death Insurance
Accidental death insurance is type of life insurance that only 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.
Life Insurance Underwriting
There are three different ways that underwriting can occur: fully underwritten, through accelerated underwriting, or via no medical exam.
1. 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.
2. Accelerated Underwriting
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!
3. 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.
Have Questions? We Can Help
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 50 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, or advice about which type of policy you should choose, give us a call. Toll-free, no obligations: 855-247-9555. Our services are free and there is not cost to apply for coverage. You can also request a free quote below to instantly compare rates from dozens of life insurance providers.