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When it comes to life insurance, there is no one-size-fits-all policy; different policies will suit different needs. There are two main types of life insurance 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 also individual and group policies. Individual policies are life insurance policies you purchase independently, while group life insurance policies are available through your employer.

Insurance policies can have strict requirements, often including a medical exam. However, some options may not require a medical exam, like simplified and guaranteed issue whole life insurance. Other types of policies also cater to specific circumstances, such as final expense, accidental death and dismemberment, and joint life insurance.

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Table of Contents

Life Insurance: The Anatomy of a Policy

Life insurance establishes an agreement between a person and an insurer. The person, known as the policy owner, makes consistent premium payments. In return, the insurer commits to delivering a death benefit to the designated beneficiaries upon the policy owner's passing.

The fundamental objective of life insurance is to offer financial security to the dependents of the insured individual following their death. It can be a part of a comprehensive financial plan, offering financial coverage that helps beneficiaries cover their bills and other living expenses.

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, including:

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    The policy's term is how long it lasts. For instance, whole life insurance covers you for the rest of your life and will not expire. Term life insurance provides coverage for a fixed number of years.

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    The premium is how much you pay for the policy. You can pay on a monthly, quarterly or annual basis. You can even choose to pay a lump sum for a policy.

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    Death Benefit

    The death benefit is how much your beneficiaries will receive from your policy after you die.

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    This is who will receive the death benefit once you die.

These are the minimum components of a policy — no policy should be without these.

Depending on your needs and preference, you may also choose to purchase additional coverage in the form of riders. Riders are add-on provisions to a basic insurance policy that provide additional benefits at an extra cost. Common riders include guaranteed insurability for additional coverage, accelerated death benefit for terminal illness and waiver of premium for disability.

Main Types of Life Insurance

There are two main types of life insurance: term life insurance and permanent life insurance.

  • Term life insurance offers protection for a designated timeframe.
  • Permanent life insurance policies like whole life or universal life extend coverage for the insured's entire lifetime and have the potential to build up a cash value as time progresses.

Choosing the right life insurance policy depends on your personal circumstances and financial goals. It's important to understand the different types of life insurance, their costs and their benefits before making a decision.

Term Life Insurance

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.

Level Term Life

A level term policy features premiums and death benefits that remain the same throughout the policy's life. This means that the amount you pay and the amount your beneficiaries will receive upon your death will not change during the term of the policy. This type of term life insurance provides a consistent, predictable benefit, making it a popular choice for many individuals.

Yearly Renewable Term

A yearly renewable term policy allows a policyholder to renew their coverage each year without having to requalify or undergo a medical exam. The premiums for this type of policy can increase each year as the policyholder ages, but the death benefit remains the same. This type of term life insurance can be a good choice for those who want the flexibility to adjust their coverage annually.

Decreasing Term Life

A decreasing term policy’s benefits decrease over time. This means that while the premiums may stay the same, the death benefit reduces each year until it reaches zero at the end of the term. This type of term life insurance is often used to cover a debt that decreases over time. Two common types of decreasing term policies are mortgage life and credit life insurance.

  • Mortgage Life: This type of decreasing term life insurance is designed to cover your mortgage debt. If you pass away before your mortgage is paid off, the policy can pay the outstanding balance directly to the lender. 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. The policy's death benefit decreases over time, aligning with the decreasing balance of your mortgage, but premiums remain the same throughout the term.

  • Credit Life: This is another form of decreasing term life insurance that pays off your outstanding loans or credit card debts in the event of your death. The policy's death benefit decreases as you pay off your debts, and the policy expires once the debts are fully paid. This type of insurance is often offered when you take out a loan or a line of credit. It provides peace of mind that your debts will be covered should something happen to you.

Term Life Insurance FAQs

MoneyGeek answered some of the most commonly asked questions about term life insurance.

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

Average Monthly Term Life Insurance Rates by Age

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. 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. Your gender may also affect the cost of your premium.

Average Monthly Rates for a $250,000 Term Life Policy by Age
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Whole Life Insurance

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.

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.

Whole Life Insurance FAQs

MoneyGeek answered some of the most commonly asked questions about whole life insurance below.

Universal Life Insurance (UL)

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 a UL policy as a mutual fund with free insurance. There are two types of universal life insurance policies: indexed (IUL) and variable (VUL).

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At a basic level, the most significant difference between universal and whole life insurance involves its benefits. Whole life insurance requires lifetime payments. However, you can rest assured that your beneficiaries will get the full death benefit plus any accrued interest.

Alternatively, UL policies invest your funds in the stock market, growing tax-deferred profits that you can use to pay for premiums. However, you’ll have to shoulder any losses that drop your fund value under the minimum premium payments.

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.

Who Is Universal Life Insurance Best For?

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:

  • 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.

Are There Additional Fees Tied to the Management of Universal Life Insurance Accounts?

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 this fee from your policy’s value, but you may have to pay out of pocket if it doesn’t have enough funds.

Indexed Universal Life Insurance

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.

Indexed Universal Life Insurance FAQs

MoneyGeek answered some of the most commonly asked questions about universal life insurance policies.

Variable Universal Life Insurance

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.

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IUL invests premiums in market indexes. On the other hand, VUL policies let you invest in individual stocks, bonds and securities, giving you company shareholder rights.

Generally, individual assets carry more risk. However, they also allow you to reap the full benefits of your investments. You might even have the power to vote on company decisions depending on the number of shares in your VUL policy.

Variable Life Insurance FAQs

MoneyGeek answered some of the most commonly asked questions about variable life insurance below.

Life Insurance Without a Medical Exam

In most life insurance policies, there is a strict underwriting process that evaluates your level of risk and often includes undergoing a medical exam. 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 provided, the cheaper your premium will likely 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 that don't require a medical exam. Several types of life insurance are not underwritten, including the following discussed below.

Group Life Insurance

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 for this coverage. Fortunately, premiums will cost less than a typical whole life insurance policy.

Group life insurance plans yield several benefits but also have limitations. 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.

Simplified and Guaranteed Issue Whole Life Insurance

If you want an easy-to-get policy without frills, you may want to consider a simplified or guaranteed issue whole life insurance policy. These two individual policies don’t require medical exams. Instead, 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 form of coverage if you’re terminally ill.

Before applying, note that simplified and guaranteed issue whole life insurance policies have several key differences. The latter generally has higher premiums. 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 of coverage.

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Guaranteed life insurance has the most lenient underwriting process of any other form of life insurance. Almost anyone could qualify. However, keep in mind that insurers set steep annual premiums and low coverage to compensate for the risk.

Additionally, a waiting period has to pass before claims are valid. Simplified and guaranteed life insurance beneficiaries won’t receive the full benefit amount if the insured passes away within two years of application. At most, they’ll only get the paid premiums plus a small interest rate.

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
  • Need fast coverage for urgent final expenses
  • Are older and don't have life insurance coverage
  • Don’t mind paying extra for insurance

Final Expense Life Insurance

Final expense life insurance covers the end-of-life costs your living beneficiaries will need to cover, such as medical, funeral and burial expenses. Beyond this, final expense insurance doesn’t cover much. However, it’s an affordable insurance policy you can get at almost any stage of your life. Unlike whole life insurance, insurers tend not to reject older adults.

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.

Other Types of Life Insurance

Beyond traditional life insurance policies, there are other types of coverage that may not be as commonly known but can provide specific coverage tailored to certain situations. These include accidental death and dismemberment and joint life insurance.

Accidental Death and Dismemberment

Accidental death and dismemberment (AD&D) insurance provides coverage in the event of a serious accident. This policy pays out if the policyholder dies or loses sight, speech, hearing or functioning of a limb due to an accident. It's often offered as a rider to a standard life insurance policy or as a standalone policy.

Joint Life Insurance

Joint life insurance is a policy that covers two people, typically spouses, and pays out on the occurrence of either the first death or the last death. There are two types:

  • First-to-die: This policy pays out upon the death of the first policyholder. It's often used to provide financial support for dependents or to cover a mortgage or other large debt.
  • Last-to-die: This policy pays out upon the death of the last surviving policyholder. It's often used for estate planning purposes, such as covering estate taxes.

How to Pick a Life Insurance Policy

Choosing a life insurance policy requires careful consideration. It's about finding the right coverage that aligns with your financial goals and provides security for your loved ones.


Assess Your Needs

Start by evaluating your financial situation and identifying your dependents' needs. Consider your income, debts, living expenses and future financial obligations. This will help you determine how much coverage you need.


Understand the Different Types of Policies

Research about the different types of life insurance policies available. Understand the differences between term, whole, universal and other life insurance policies.


Compare Quotes

Prices can vary significantly from one company to another for the same coverage, so it's important to get quotes from multiple insurance companies. Use online tools or work with an insurance broker to compare rates.


Review the Policy Details

Before making a decision, carefully read the policy details. Understand the terms, conditions, exclusions and the process for filing a claim. If there's anything you don't understand, don't hesitate to ask questions.


Consider the Insurer's Reputation

Look at the insurer's reputation for customer service and their financial stability. Check online reviews and ratings from independent agencies like AM Best and Standard & Poor's.


Regularly Review and Update Your Policy

Once you've purchased a policy, it's important to review it regularly and update it as necessary. Major life events like marriage, the birth of a child, buying a home or changing jobs can affect your coverage needs.

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Your life insurance insurability, or the risk that an insurer takes on when issuing a policy, can significantly impact your premium. Factors such as age, health status, lifestyle habits (like smoking) and family medical history can all affect your insurability. It's often advantageous to secure a policy when you're young and healthy. While some policies, like guaranteed issue life insurance, can offer coverage without a medical exam for people who are less healthy, these plans typically come with higher premiums. Always consider your current and future insurability when choosing a life insurance policy.

Frequently Asked Questions About Life Insurance

Given the multitude of life insurance choices, it can be challenging to determine which is best for you and your loved ones. Review some of the most frequently asked questions below to understand your options.

About Melissa Wylie

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Melissa Wylie is a Content and SEO Manager at MoneyGeek. Melissa has worked in the financial content space since 2018 and has spent much of that time focused on all things small business.

Prior to joining MoneyGeek, Melissa held SEO positions at Bankrate and LendingTree. Melissa’s work has also appeared on LendingTree-owned websites ValuePenguin and MagnifyMoney.

Melissa began her career at American City Business Journals in 2015 as a reporter for the company’s women-focused publication Bizwomen. Melissa has a Bachelor of Arts in Journalism from the University of North Texas. Melissa relies on her foundation in journalism to craft content that simplifies complex financial topics to help everyone feel confident when making decisions with their money.

Melissa's other work can be read on LendingTree and Bizwomen.