Everyone encounters the concept of life insurance at some point. While some people simply see it as a method of helping their loved ones in the event of their death, there are others who understand that there is more to it than just that.
Since there are people who don’t give it that much thought, they don’t take the time to explore the various avenues that are available to them. For example, did you realize that there were multiple forms of life insurance that you could access?
There is not just one vanilla option that everyone must use. Technically, there are only two types of life insurance, and all others are subdivisions of one of the two. However, if you were supposed to count the main line life insurance types and the subdivisions, there are nine different forms that you can benefit from.
While a more in-depth explanation is provided for each type throughout the article, here is a brief look at the two main types from which all others are derived.
The first form is term life insurance. With a term life insurance policy, the agreement between you and the insurer has a designated period for which the policy applies. You pay your premiums during this time, and in the event of your death, a sum known as a death benefit is paid to your family members.
Note, however, that, when this term expires, the policy is no longer active. So if you should die after the prescribed time, there is no benefit paid to your family members, as if the policy never existed.
With a whole life insurance policy, on the other hand, there is no preset term for which the policy is deemed active. Instead, the policy has a permanent term, and whenever you die, the death benefit is paid to your family members. The only thing that you need to do is ensure that your premiums are continuously paid, and once you do that, the policy lasts you for a lifetime.
The life insurance policy types to be described throughout this article are as follows:
- Term life insurance policies
- Whole life insurance policies
- Universal life insurance policies
- Variable life insurance policies
- Variable universal life insurance policies
- Simplified issue life insurance policies
- Guaranteed issue life insurance policies
- Final expense insurance policies
- Group life insurance policies
Term Life Insurance
As alluded to before, term life insurance has a period during which the policy is deemed active. This tends to span several years, upon which the insurer and the person to be insured agree.
The amount of money that is supposed to be paid out as a death benefit is also set at this time. Of course, you determine the number of beneficiaries to be placed on your policy, and the percentage of the total death benefit to be paid to each.
Your only responsibility is to ensure that your premiums are continuously paid for the term of your policy. When you’re setting up the policy, you can also determine the way in which the funds are disbursed to your beneficiaries.
Death benefits payments are most commonly made as a lump sum, which means that each beneficiary gets the total amount that they are due in one payment. However, some people prefer that the payments are made monthly, as a salary would, or some people opt for the payments to be done in the form of an annuity. Note that many policies allow the beneficiaries to choose how they get their payments.
This is one of the most affordable forms of life insurance policies, because it has the least bells and whistles of them all. Premium payments are not very pricey and can be as low as $30 a month for young people who have no health issues. The term is not necessarily a short one either, as these policies can run for as long as 30 years.
Note that the people who opt for a term life insurance policy are the only ones who should subscribe to the belief that the policy exists only as a method to help family members in the event of death, since there are no additional features present.
Whole Life Insurance
This type of insurance is where things begin to get interesting, as it is more than just a vanilla offering. The first point of difference between a whole life insurance policy and a term life insurance policy, as stated before, is the fact that the whole life insurance policy is a permanent one.
Like the term life insurance policy, however, this policy type has an affixed death benefit that is paid out to named beneficiaries in agreed proportions in the event of the policy holder’s death.
The difference, however, is in the savings benefit. If you’ve ever had a critical illness policy, the chances are that there is a cash value attached to same. This means that if you should ever find yourself struggling through a rough patch, you can make a withdrawal against your policy for a certain amount.
In some cases, this cash value is equal to the amount of money that you have paid towards the policy in premiums up to the point at which you wish to make the withdrawal. The cash value can be greater than that amount, however, if it is a policy in which the funds are used for some form of investment. This yields a beneficial return to you.
When you get a whole life insurance policy, a similar cash value is affixed to it. However, there is the establishment of a special kind of savings account, which is tax-deferred, and your payments toward the savings plan are placed there. The funds in this account accrue interest overtime at a fixed rate, which is established and agreed upon at the time the policy is being signed.
You can, therefore, divide the amount of money that you pay towards your premium into two parts. There is the part that goes to your life insurance, which provides a death benefit to your named beneficiaries. Alternatively, there is a portion that is retained and placed into the special savings account that maintains a cash value.
As you may have expected, the cost of a whole life insurance policy is comparatively higher than that of a term life insurance policy. In fact, for a fixed death benefit amount, you may find that the whole life insurance policy can cost as much as 15 times more than the term alternative.
If you are taking out this kind of policy, ensure that you understand all the stipulations that surround the cash value component. Concepts, such as the amount of interest and surrender fees, are just a couple things that you need to be acutely aware of.
Universal Life Insurance
The next policy type on the list is a universal life insurance policy, which is comparable to the basic whole life insurance policy. To that end, it has a cash value component, as well as a death benefit component. The premium that you pay goes towards both aspects as normal.
What you may not have realized with a whole life insurance policy, however, is that the premium and the death benefit amount are fixed. This is where a universal life insurance policy differentiates itself.
If you ever wanted to change these aspects of your whole life insurance policy, your only option would be to start a new policy. With the universal life insurance option, however, you can make changes to these figures while maintaining your existing policy. Note that you can adjust a term life insurance policy’s death benefit.
Additionally, the way in which you pay your premium can be different. There is a minimum amount that you need to pay to ensure that your policy remains in effect. However, you can call on the cash value associated with your policy for payment of the premium.
In fact, persons who have this policy and have accrued enough interest tend to allow the said interest to make the premium payments on their behalf.
Note, however, that market interest rates play a huge role in the kind of return that you get on your universal life insurance policy’s cash value.
You also need to bear in mind the fact that increasing or decreasing the death benefit may not be as simple as a request submission. Should you choose to decrease it, there could be fees associated that are up to the discretion of the insurance provider. If you increase it, you may find that you need to deal with further underwriting.
Variable Life Insurance
This insurance type is another that bears similarities to a whole life insurance policy. The two have a cash value component that is offered with the death benefit component. However, the workflow of the cash values under the two policies are not the same.
As stated before, your whole life insurance policy creates a specialized savings account with a tax-deferred component, in which the funds are placed. Since there is an account, there is a guaranteed return, though you may notice that this growth is miniscule when compared to other investment options that you could explore. Additionally, you receive dividend payments at the appointed intervals.
The cash value in your variable life insurance policy functions less like money in a savings account and more like money that is dedicated entirely to investing.
Instead of residing in a single account, the money is separated and placed into various miniature accounts that function as mutual funds do. The caveat here, however, is that, while there is potential for amazing growth, you also stand to lose, as you could with normal stock investments.
Of course, this means that your variable life insurance policy functions as a way better insurance tool than a whole life insurance policy. You just need to accept the fact that the kind of risk associated with investments is also a factor. You should also note that you are not given much of a choice of which miniature accounts your funds are invested in. You can only choose from the accounts that your policy allows access to.
Variable Universal Life Insurance
Here’s where things begin to get interesting. Based on the name, this policy sounds as if it pulls on elements from both the variable and the universal forms of life insurance, doesn’t it? In a sense, it does; however, there is a level of uniqueness to it.
The idea of this policy is to give you an increased level of flexibility when compared to the other two. As you know, these policies include both a death benefit and a cash value. The differentiation here comes in the way how the variable universal life insurance policy modifies the terms associated with the other two.
Like you can with a universal policy, you can adjust your premium amount and your death benefit. Additionally, as you can with a variable life insurance policy, you get to invest your cash value in a pool of sub-accounts that behave like mutual funds.
While this combination appears to combine beneficial elements of the other two policy types, the result is usually that people end up with a life insurance policy that is needlessly complex.
There are better ways to go about both insurance and investing. Note, however, that this is not to say that this kind of policy is completely useless. There are people with a certain goal and a certain level of understanding who can use a policy like this to great effect.
However, you may find that using a simple term or whole life insurance policy and an actual mutual fund investment can offer you the same kind of coverage you get here with less worry.
Simplified Issue Life Insurance
The next policy type to be covered is one that is only beneficial to a specific set of people. A life insurance application is a process that requires a lot of information from you and a review on the part of the insurance provider.
One of the key elements of this application process is the fact that a medical examination must be done. Most life insurance types are provided based on your health. Your premium is determined based on your age and how healthy you are.
It’s a simple equation. If you are likely to outlive your policy, then your premiums tend to be lower. If not, however, then you may end up either being denied or being assigned much higher premiums.
The idea of the simplified life insurance type is to appeal to those who wish to skip the medical exam procedure. While this is useful for people who may have certain issues, it is ill-advised for a person in good health to go for this kind of policy, as the lack of a medical exam means that there is a higher cost.
Also, though there is no formal examination, there are still certain health questions that must be answered during a health questionnaire. If someone has too many health issues or complications, the exam may still be required.
Just remember that the premium is no longer necessarily tied to the state of your health, which means that a healthy person could end up paying just as high an amount as someone who is in comparatively worse health.
Guaranteed Issue Life Insurance
Though the simplified life insurance offering is more accepting, as there is no health exam requirement initially, the presence of too many complications can flip that on its head. Of course, the only way that the said complications come to light is through the responses provided to the health questionnaire.
What if there were a form of insurance that eliminated the questionnaire completely? This is where guaranteed issue life insurance comes into the picture. Just as the simplified type does, this form requires no health examination to be completed as a part of your application process.
Additionally, the health questionnaire step is also illuminated, which means that there is no scenario in which you must find yourself taking an exam. This applies regardless of your state of health.
The only information that is needed consists of basic things, such as your age, gender, and place of residence.
All that is required from you is the ability to pay the assigned premium. You should note, however, that the said premium is likely to be much higher than that of other insurance policy types.
Remember that insurance companies have a responsibility to manage risk. Therefore, there needs to be some sort of allowance for such an open policy, which comes in the form of heightened premiums.
The bulk of those who opt for this kind of policy consists of elderly people. This is because their ages and likely states of health make access to other policy types very difficult.
Final Expense Insurance
A guaranteed issue life insurance policy is typically used by people who want to at least be able to cover their funeral expenses. After passing on, these costs can be very hefty for your loved ones to bear. Therefore, a life insurance policy provides an avenue for funding to assist in this regard.
Apart from the guaranteed form of insurance, there is final expense insurance, which is wholly dedicated to the coverage of all expenses that are synonymous with your death. This could be in the form of funeral, cremation, or even medical costs.
Anything that has to do with your final expenses leading up to death is fair game. Therefore, the people who are approved for this kind of insurance tend to be of a certain age.
There is a cash value attached to this kind of policy, as there is with other life insurance policies that have a permanent term. In most cases, the final expense policy boils down to a simplified issue one. However, if the health questionnaire is failed, you get a policy that is more akin to a guaranteed issue policy.
Of course, this kind of insurance tends to be attractive to the elderly, when there is no other kind of insurance in place. As you may expect, the same advantages and disadvantages that apply with simplified issue or guaranteed issue policies apply here, depending on the type that you are assigned.
Group Life Insurance
The final policy type to be covered is that of group life insurance. While others on the list are usually done via personal application, this type tends to be a corporate offering. It is not provided by all employers, but it’s a neat benefit from the ones that do.
While this policy type is categorized as a life insurance policy by many, its workflow technically makes it something different entirely. In most cases, this type of insurance is like the term type, but there are scenarios in which it bears more similarities to a whole life insurance policy.
The purpose of highlighting it in this article is that many people believe that this is all they need where life insurance is concerned. However, you may find that many of these policies provide no protection for the people who would normally be your beneficiaries.
Additionally, the coverage that you are provided under these policies is comparatively lower than that which you would normally be allocated from the other types.
Therefore, while you should take advantage of group life insurance, it should never be the basket in which you put all your eggs. Assess your needs and determine if it is necessary for you to get additional coverage.
Choosing a Life Insurance Policy
As you can see, based on all the information provided, there are numerous options where life insurance is concerned. The idea is always to evaluate all the options and ascertain which of the insurance types provides the most benefit to you. You also want to ensure that the policy that you choose is one that is affordable.
Most people settle on a term life insurance policy, as it provides the required death benefit, and it is usually very affordable. However, this is not true for everyone, which is why you need to bear your unique situation in mind.