Understanding the Different Types of Life Insurance
Wondering what type of life insurance is best for you? This will depend on a variety of factors, including how long you want the policy to last, how much you're willing to pay, and how you want to use the policy - i.e. to protect your family or leave a legacy, as a savings vehicle, a source of financing, or to provide tax-advantaged retirement income.
All life insurance is not created equal, so let's take a closer look at some of the options:
Term Life Insurance
- This is the most commonly-owned type of life insurance, and it is typically sold in lengths of one, five, 10, 15, 20, 25 or 30 years. Coverage amounts may vary, and the policy may be either "level" - locked in for the specific term, or "annual renewable" - where the premium will change each year. Term policies don't usually accumulate cash value, and are used to provide protection via a death benefit only.
- Pros: Often the cheapest option for buying life insurance
- Cons: If you outlive your policy, your beneficiaries won't receive a payout. (In fact, statistics show that only about 1% of term insurance policies ever pay a claim.)
Whole Life Insurance
- This type of insurance gets its name from the fact that it is designed to last until your death, as long as you pay the premiums. Your premiums are fixed, you receive a certain guaranteed rate of return on the policy's cash value, and it's very "hands-off" as you don't need to monitor or "manage" your policy. Depending on available riders, you may also be able to protect your spouse or children, receive a disability benefit, and/or build tax-advantaged retirement savings within the same policy.
- Pros: It covers you for your entire life plus builds cash value that you can use and access during your lifetime - either for financing needs or as retirement income (read more about this here)
- Cons: It's typically more expensive than term life and some other permanent policies (this is largely because whole life policies are designed to last your whole life, so they are much more likely to end up paying out a claim than a term policy)
Guaranteed Universal Life Insurance
- In these policies, the death benefit is guaranteed to a certain age and premiums are fixed. These policies don't usually accumulate cash value.
- Pros: Due to the minimal cash value, it's cheaper than whole life and other forms of universal life insurance
- Cons: Missing a payment could mean you forfeit the policy - and since the policy has no cash value, you would end up with nothing (similar to a term policy)
Indexed Universal Life Insurance
- This type of life insurance links the policy's cash value component to a stock market index like the S&P 500 via a specific formula which is defined in the policy.
- Pros: You can access cash value, which grows over time, and you may see considerable gains if the stock market performs well. You also have some flexibility in the premiums and death benefit amount.
- Cons: Due to investment caps, the cash value doesn't take full advantage of stock market gains; also, since these policies typically include a term component, they may become prohibitively expensive in your later years, or could begin to lose their cash value or even lapse just when you may need them most
Variable and Variable Universal Life Insurance
- These policies can accumulate cash value and are typically tied to investment accounts such as bonds and mutual funds.
- Pros: There's potential for considerable gains on your investments, and you can take partial withdrawals from the cash value or borrow against it
- Cons: It requires you to be diligent at managing your policy as the cash value can change daily based on the market, and any administrative fees are deducted from your payment before going toward the cash value; they are also subject to the cons of IUL listed above
Simplified Issue Life Insurance
- These are usually term-type policies with an easy qualification process, which usually have relatively low limits.
- Pros: There isn't a medical exam required for coverage
- Cons: Despite no medical exam, you'll have to answer some questions and could be turned down based on those answers; also see cons of term insurance listed above
Guaranteed Issue Life Insurance
- These types of policies are typically used for final expenses by those who are not able to qualify for other types of insurance.
- Pros: You can't be turned down for coverage if you're within the eligible age range, which is typically 40 - 85
- Cons: This is an expensive way to buy life insurance, and coverage amounts are generally low
As you can see, there are some major differences between the different types of life insurance, so it's best to talk through the various policy options with a financial professional, who can help you figure out which type of life insurance may be best for your particular needs and goals. Contact us at 614-300-9501, or fill out our contact form, and we will be happy to help you talk through your options.
This document is for educational purposes only and should not be construed as legal or tax advice. One should consult a legal or tax professional regarding their own personal situation. Any comments regarding safe and secure investments and guaranteed income streams refer only to fixed insurance products offered by an insurance company. They do not refer in any way to securities or investment advisory products. Insurance policy applications are vetted through an underwriting process set forth by the issuing insurance company. Some applications may not be accepted based upon adverse underwriting results. Optional riders may have an additional cost. Life insurance policy loans will reduce the cash value of the policy and the death benefit. Unpaid policy loans may accrue interest that could lead to policy lapse, loss of tax benefits, or both. Death benefit payouts are based upon the claims paying ability of the issuing insurance company.