What Are the Different Types of Life Insurance?

When it comes to life insurance, there is no one-size-fits-all policy. Different policies will suit different needs, but life insurance can be a good investment, even if you’re healthy.

There are two main types of policies: term and whole life insurance. Term life insurance expires after a set period, while whole life insurance provides lifetime death benefits. Aside from these, there are individual and group policies. Individual policies comprise term and life insurance policies you can purchase independently, while group life insurance policies are available through work.

Insurance policies can have strict requirements, often including a medical exam. However, some options may not require a medical exam. These include guaranteed issue whole life insurance, mortgage life insurance and final expense life insurance.

• Anatomy of a Policy
• Term Life Insurance
• Whole/Permanent Life Insurance
• Universal Life Insurance
• No-Medical-Exam Life Insurance
• Mortgage Life Insurance
• Final Expense Life Insurance
• FAQs

Understanding the ins and outs of a policy is essential to deciding which suits your situation best. While the exact parameters will depend on the type of policy you get, all policies share a few common features.

Remember that these are the minimum components of a policy and no policy should be without these.

When purchasing life insurance, you will encounter many key terms. Review some of the most commonly-mentioned terms below.

Among life insurance policies, term life insurance is one of the most popular types. Term life is a type of policy that is limited by the length of coverage. A term is a period in which the policy is active, and it will expire on a specified date. There are three types of term policies: level term, decreasing term and renewable term.

A level term policy features premiums and death benefits that remain the same throughout the policy's life, while a decreasing term policy’s benefits decrease over time. A renewable term policy allows a policyholder to renew their coverage without having to requalify. The premiums and death benefits also remain the same as the person ages.

For more information on term life insurance, check out these pages.

The average cost of term life insurance can change based on your age when you apply. Review the premium table below to see the average monthly rates by age and term for a $250,000 policy. However, note that this may not be accurate if you have pre-existing conditions or smoke, as those who pose a higher risk may have more expensive policies.

Whole life insurance is a form of permanent life insurance typically used to pay for funeral costs, end-of-life expenses and debts. This type of coverage, also known as ordinary life or continuous premium life insurance, guarantees a set death benefit and premium amount and can build cash value over time. In other words, the premium is fixed for the life of the policy as you age. However, this does not apply if you have a universal life insurance policy.

A whole life insurance policy also comes with more investment benefits, as part of the policy will be invested in funds of your choice. This means more potential for monetary gains and losses over time.

For more information on whole life insurance, check out these pages.

Universal life (UL) insurance, otherwise known as adjustable life insurance, is a policy that lets owners customize their premium payments, cash fund value and death benefits. With this type of insurance, you have total control of your policy. Your insurer will invest your money in the stock market, so think of UL as mutual funds with free insurance.

It’s worth noting that UL is best for individuals who have money they’d like to invest and are investment savvy. The policyholder is responsible for choosing their plan’s components — including where the provider invests the funds. Remember that while a UL policy allows you to grow tax-deferred cash funds in a self-sustaining policy, you could also lose everything in a market crash.

There are also two types of universal life insurance policies: indexed (IUL) and variable (VUL). Review the comparison between the two below.

UL might seem like an excellent all-around investment-protection plan, but like any investment, it has risks and may not be for everyone. Only consider IUL and VUL plans if you have a/an:

• Lengthy investment horizon: Between the gradual market growth and steep management fees, you’ll need to let your money sit for at least a few decades. Otherwise, you won’t maximize the potential of your UL policy.
• High-risk investment appetite: IUL and VUL policies invest in market indexes and individual assets, respectively. Note that both options carry some degree of risk. If you don’t feel comfortable with the associated risk, consider other insurance options.
• Whole life insurance policy: Unfortunately, if your UL funds aren’t performing well, your beneficiaries won’t receive their full death benefit. You’d do well to have another insurance policy in place.

Apart from the monthly premiums, you’ll also have to pay a monthly asset management fee. After all, your manager will actively oversee your investments. Both IUL and VUL policies will deduct them from your policy’s value, but you can pay out of pocket if it doesn’t have enough funds.

Indexed Universal Life Insurance (IUL) provides lifetime protection for fixed-term payments. An IUL invests your money in market indexes, not individual stocks and bonds, which means capital growth will be slower. However, since you have a diversified portfolio, your fund manager can use appreciating assets to cover more losses.

An IUL is a perfect option for conservative investors. It is a relatively safe gateway to the stock market without compromising security and insurance. Of course, every investment has risks. However, you and your fund manager can prevent total losses by setting reasonable principal depreciation limits. It may not be available in all states.

Variable Universal Life Insurance (VUL) is a type of UL that invests your premiums into individual assets. You can buy any stock, bond, or security of your choice. Depending on the performance of your assets, your funds might grow larger in a VUL policy in the long run.

However, despite being the most flexible, VULs also come with a higher risk. Unlike IUL, you can’t set index caps and floors, so you’ll have to hedge your funds through asset division and market timing. But don’t worry if you’re still learning stock market investing. If you commit to minimum payments, your policy should always have enough funds for coverage and investments.

In most life insurance policies, there is a strict underwriting process that evaluates your level of risk. Below are a few key points to understand:

• The underwriting process accounts for your lifestyle, hobbies, medical history, occupation, gender, age, mental health and more.
• Even if you aren’t in perfect health, providing the insurer with detailed, honest health information will lead to lower premiums. The more comprehensive the information given, the cheaper your premium will be.
• Insurers will charge a higher premium to people with poor health or unhealthy lifestyles.
• Some insurers determine coverage options based on accelerated options that use algorithms and less comprehensive medical questionnaires. Although this option is more streamlined, it often requires good health and may not suit the elderly.
• Some companies can deny your application if you do not meet their standards.

Fortunately, there are options for those who are not sure they may pass the underwriting process. Several types of life insurance are not underwritten, including the following discussed below.

As its name suggests, group life insurance covers a specific group of people who will receive the same benefits. Employers typically offer these policies to employees. Depending on your company’s contract, you might have to shoulder a portion of the payments. Fortunately, premiums will cost less than a whole life insurance policy.

Group life insurance plans yield several benefits but also have limitations. You may not want it as your primary policy. You’ll receive the same coverage as everyone else within the group, which means it may not align with your and your family’s specific needs. Only your employer can customize your policy.

Note: Company group policies still undergo underwriting procedures. Regardless of your employer or your status, you won’t qualify for insurance if you:

• Have a terminal illness
• Partake in dangerous hobbies
• Perform a high-risk, hazardous job
• Provide incorrect medical and health information

Since a group life insurance policy is obtained during employment, you can expect the policy or coverage to end once you leave the company.

If you want an easy-to-get policy without frills, you may want to consider a simplified or guaranteed issue whole life insurance policy. They’re two individual policies that don’t require medical exams. Your insurer will ask you a few health and medical questions, which shouldn’t take more than a few minutes to finish.

However, insurers will still do basic underwriting. Although they won’t ask you to undergo medical exams, they’ll confirm your condition with their third-party sources. As a general rule, you won’t qualify for either if you’re terminally ill.

Before applying, note that simplified and guaranteed issue whole life insurance policies have several differences. The latter generally has high premiums. The guaranteed acceptance insurance also caps at $25,000 worth of coverage; only a handful of insurers even consider $50,000.

Alternatively, simplified life insurance has a slightly more rigid underwriting process but has lower premiums and higher coverage limits. A healthy adult might qualify for $100,000 to $250,000.

Simplified and guaranteed life insurance policies are not for everyone. Their premiums cost more, and coverages cap at $25,000 and $250,000, respectively.

However, you might benefit from these policies if you:

• Can’t qualify for other life insurance policies
• Think you only have a couple of years left
• Need fast coverage for urgent final expenses
• Have grown old without any life insurance coverage
• Don’t mind paying extra for insurance

Mortgage payments don’t get paid off after death. Lenders can legally ask the surviving family members of a deceased debtor to pay off the outstanding balance. Otherwise, they’ll foreclose the home.

If no other adult in your family works, they’ll have no choice but to use your life insurance benefits — and considering real estate prices; your beneficiaries may quickly blow through their inheritance.

Mortgage life insurance is one option to ensure your loved ones have enough money to continue payments on their primary residence. It’s cheaper than traditional life insurance coverage. However, note that the mortgage lender will be the beneficiary of your policy, which means your loved ones may not receive a death benefit if you die during the policy’s term. Instead, mortgage insurance will eliminate the rest of your mortgage if you die while the policy is active.

As its name suggests, final expense life insurance covers the end-of-life fees your living beneficiaries will cover (i.e., medical fees, funeral expenses, burial, etc.). Beyond this, it doesn’t cover much. However, it’s also a very affordable insurance policy you can get at almost any stage of your life. Unlike whole life insurance, insurers won’t reject older adults altogether.

While the low premiums may seem attractive, note that this is due to low coverage. Term life and whole life insurance policies may still cover final life expenses. This type of policy benefits those whose beneficiaries are financially-established and need minimal financial support.

Given the myriad life insurance choices, it can be challenging to determine which one to get. Review some of the most frequently asked questions below to understand the options better.