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What Are the Different Types of Life Insurance

Updated: Oct 28



Life insurance provides an incredible amount of protection and peace of mind to those insured and their loved ones, and it can be a very valuable financial tool. But what kind of life insurance is right for your needs, budget, and family?


While the process of getting life insurance coverage can seem complex, it’s relatively simple in most cases. We’re here to help demystify the differences between life insurance terms and types, plus explain how to decide which life insurance policy may be the right fit for you. Let’s get started!


What Is Life Insurance?

As defined by Investopedia, “Life insurance is a contract between an insurer and a policy owner. A life insurance policy guarantees the insurer pays a sum of money to named beneficiaries when the insured dies in exchange for the premiums paid by the policyholder during their lifetime.”


Put simply, life insurance involves paying a premium either up front or periodically — e.g. monthly — to honor the insured’s side of the contract. Upon the insured’s passing, if the policy is still in effect, the life insurance company pays out the death benefit to the beneficiaries named by the insured.


Because the policyholder (the insured) must disclose health conditions and high-risk activities when applying for coverage, the application process generally includes some sort of health screening along with a potential brief exam. These requirements come at no cost to the insured, but they can take some time to review by the insurance company when evaluating a new application for coverage. Once they are reviewed, the life insurance company makes an offer to the proposed insured that includes the amount of coverage and the premium cost. After the insured accepts the offer and pays the premium, the policy is in force.


Before getting to the application process, however, one of the most common questions has to do with the various types of life insurance, along with their benefits and differences. We’ll discuss that next.


Term Life Insurance vs. Permanent Life Insurance

Term life insurance is a policy that is valid for a certain period of time — a term — after which it expires. If the policyholder passes away prior to the expiration of the term policy, the death benefit is paid to the insured’s beneficiaries according to the contract terms.


Permanent life insurance is valid until the passing of the policyholder, at which point it becomes payable to the beneficiaries listed on the policy, again according to the terms of the contract.


Each of the two main categories of life insurance has a few sub-types that can be helpful to understand when considering which kind of life insurance suits your needs.


Types of Term Life Insurance

Remember that term life insurance has an expiration date, set as part of the contract. Often these are in increments such as 10, 20, or 30 years. This can allow for a more customized approach for those who do not believe they need a policy longer than a certain timespan, and a shorter term can be more affordable than a longer term.


Within term insurance coverage, these are the three main types:

  • Convertible Term: This type of policy allows the policyholder to convert their term policy to a permanent policy without having to go back through a health screening. Premiums for these policies are often higher than those for traditional term life insurance policies because of this ability to convert if, for instance, their health begins to deteriorate but the term policy would expire prior to their need for it. Bear in mind that there may be additional costs associated with converting this policy type to a permanent life insurance policy.

  • Renewable Term: Also referred to as yearly renewable term (YRT), annual renewal term, or increasing premium term insurance, this policy type is a one-year policy and can be renewed each year. However, because rates will vary based on age and other factors, a yearly policy means that the premium amount will more than likely increase each year at renewal. While this can be more affordable in the short term if a person is young and lives a low-risk lifestyle, renewing these policies over a span of many years can sometimes result in the policyholder paying more in the long run than if they’d purchased a different kind of policy.

  • Decreasing Term: This type of term insurance is named for its decrease in death benefit amount according to a contract schedule — often monthly or annually. The decrease in coverage amount period over period is usually coupled with a decrease in premium amount as well, also according to a schedule laid out when the policy contract is entered into. Why would a person purchase decreasing term life insurance? Well, these types of policies are commonly used to guarantee long-term loans or personal assets, and the assumption is that as time passes, the liability they’re guaranteeing with the policy should decrease, requiring less coverage.


Term Life Insurance Type

Term

Unique Features

Avg. Cost Compared to Other Term Life Options

($ – $$$)

Convertible

Varies, usually decades

Can be converted to permanent insurance without additional health screening

$$ - fixed premium for term, increases at conversion depending on coverage​

Renewable

1 Year

Very short term that may be renewed each year often means lower costs if younger and low-risk

$ – starts low but increases at each renewal

Decreasing

Varies, usually decades

Death benefit decreases over time

$$ - starts high but premium may decrease as death benefit decreases


Next, we’ll discuss the different kinds of permanent life insurance.


Types of Permanent Life Insurance

Because permanent life insurance policies stay in effect until the insured passes away, these are generally more expensive than term insurance policies. They do not expire at a certain expiration date but are instead in place for as long as premiums are paid. Below are the different kinds of permanent life insurance policies:

  • Whole Life: This type of permanent life insurance allows the policyholder to accumulate cash value within the policy which can be withdrawn or borrowed against by the insured. Cash values in whole life policies earn a fixed interest, like a savings account. However, this rate is determined by the insurance company each policy year. Dividends may also be paid out as part of the policy, either as a payout to the insured or added to the cash value. Withdrawing from the policy often reduces the death benefit, though, which is an important consideration for policyholders.

  • Universal Life (UL): Much like whole life, universal life insurance includes a cash value component that earns interest and can be withdrawn or borrowed against over time. However, universal life insurance premiums are more flexible and may change over time, according to contract terms. Additionally, death benefits may remain level throughout the policy or increase over time, again according to contract terms. Premiums will change in accordance with death benefit adjustments, age, and other factors.

  • Indexed Universal Life (IUL): This policy type is related to universal life insurance, but the cash value of the policy is invested in an index that can provide greater returns than the fixed cash value of whole or universal life. Premiums are also flexible in that the policyholder can increase or decrease the premiums paid over time, as needed, so long as the minimum premium remains paid.

  • Variable Universal Life: this type of life insurance allows the policyholder to use the cash value of the policy to invest, giving the policyholder more opportunity for growth. Variable universal life also features flexible premiums and may include either a level death benefit or an increasing death benefit.


Permanent Life Insurance Type

Cash Value

Premium

Death Benefit

Unique Features

Avg. Premium Prices Compared to Other Permanent Life Options

($ – $$$)

Whole Life

Fixed, can be borrowed or withdrawn

Fixed

Fixed or Increasing

Fixed premiums, dividends on cash value, guaranteed death benefit

$$$ - Most expensive given its fixed nature and guarantees

Universal Life (UL)

Fixed, can be borrowed or withdrawn

Flexible, sometimes fixed

Fixed or Increasing

Often flexible premiums, lower cash value, guaranteed death benefit

$$ - Less expensive than other options given lower cash value accumulation

Indexed Universal Life (IUL)

Invested, can be borrowed or withdrawn

Flexible

Fixed or Increasing

Cash value invested in an index, flexible premiums, guaranteed death benefit

$$ - Less expensive than whole, more expensive than UL

Variable Universal Life (VUL)

Invested, can be borrowed or withdrawn

Flexible

Fixed or Increasing

Cash value may be invested, flexible premiums, guaranteed death benefit

$ - Can be the least expensive option as policyholder is taking on risk with cash value and guarantees


Don’t be intimidated by the wide variety of options for life insurance — there’s a policy that will suit your needs.


Which Type of Life Insurance is Right For Me? The Bottom Line

As you’ve seen, there’s a sometimes dizzying array of features, benefits, premium types, and other factors that go into life insurance, but don’t let the details overwhelm you. Start simple: do you need a policy with a defined term, or do you need a longer policy?


For example, someone may have a larger insurance need while there is a mortgage balance outstanding or when children are young, but the budget is tight. In that case, getting a term policy for the majority of coverage and a smaller permanent policy for longer-term coverage can be a cost-conscious strategy. In other scenarios, only term or only permanent are used for coverage. Business owners may need coverage for other needs, like replacing a key employee or providing ancillary retirement benefits to an executive. Each of these situations can be covered with term, permanent, or a combination of the two.


Once you’ve made the decision on the type of coverage or combination of coverage you need, you can look at the benefit amount you need. That, along with a review of your budget for premium payments, your ability to get insured based on current or past health conditions, and your desire to have fixed or invested cash value (for permanent policies only), is all necessary when determining what coverage makes the most sense for you.


Feeling overwhelmed by the choice? Let’s chat! I’d love to help you define your needs and budget for life insurance so that you can get the best-fitting coverage for you.



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