Types of Life Insurance

Just got married? Ready to start a family or take on a new job? Change is life’s only constant, and each time your life changes drastically, you’re likely in the market for a fresh life insurance policy. 

There are different types of life insurance that are best for each stage of life. Benzinga is here to help with its latest guide to the different types of life insurance.

Main Types of Life Insurance

• Term life
• Permanent life
• Whole life
• Universal life
• Variable life
• Simplified issue life insurance
• Guaranteed life insurance
• Group life insurance

What is Life Insurance?

Life insurance is a safeguard against the unexpected. It’s a contract between you, the insured, and an insurance carrier, the insurer, in case the worse happens. 

You pay premiums, and as long as you keep making payments, the insurance carrier agrees to pay a death benefit to your beneficiary upon your death.

The 2 Main Types of Life Insurance

The 2 main types of life insurance are permanent and term. Permanent life insurance policies like whole and universal life are permanent policies because they last for the whole of your life. As long as you make your premium payments, the policy remains in force. 

In contrast, term life insurance covers you for a predetermined period of time, lasting anywhere from 10 to 30 years.

What is Term Life Insurance?

If you’re in the market for more affordable life insurance, term life is the best coverage for you. Term life is strictly a death-benefit policy that carries no cash value and is not used for investment purposes. 

Term life policies are in force for a predetermined period of time. You can sign up for 10, 20 or even 30 years. 

Premiums are low if you’re young, and many policies don’t even require a medical exam. Term life is perfect for young parents wanting to protect their families, as it carries no lifetime obligation like with a permanent policy.

Pros:

• Cheaper rates
• Consistent premiums
• Greater death benefit
• Shorter duration
• Quicker payouts

Cons:

• Possibly not be renewed
• No cash value
• Not approved for loans

What is Permanent Life Insurance?

Life insurance policies like whole and universal life are permanent policies in that they last your whole life. Permanent policies carry with them a cash value and are often used not only as a backstop against the unexpected, but for investment purposes as well. Permanent policies are not for people looking for just a death benefit, but for those looking for tax deferments and to grow capital.

Pros:

• Coverage until death
• Fixed premiums
• Cash value
• Interest bearing
• Early withdrawal and loan capabilities

Cons:

• Higher rates
• Lower death benefit
• Longer duration

Life Insurance Explained

Life insurance is intended to protect your loved ones against the financial burden of your death. If you’re the main breadwinner in the family and something were to suddenly happen to you, how would the mortgage, end-of-life costs and more be paid? That’s where life insurance steps in.

What is Whole Life Insurance?

Whole life is a type of permanent life insurance with a death benefit and a cash value. Whole life policies are the preferred type of life insurance for those looking for tax benefits and cash growth, while at the same time taking advantage of its death benefit. Whole life policies are like savings accounts with a death benefit.

What is Universal Life Insurance?

Universal life is also a type of permanent life insurance but is more flexible than whole. Like whole life, universal carries with it a death benefit as well as a cash value. 

Benefits of a universal life policy include:

• The ability to withdraw money against the policy's cash value
• Access to loans
• Cash value is interest-bearing
• Flexibility with premium payments
• Adjustable death benefit

Where universal and whole life differ is that a universal policy allows you to adjust the amount you want to pay towards the death benefit. You can also forgo premium payments if you have ample cash value. Universal life policies are for the more hands-on investor.

What is Guaranteed Universal Life Insurance?

Despite its name, guaranteed universal life (GUL) is not exactly permanent life insurance. It is, however, made to last your whole lifetime. 

Because guaranteed universal life does not carry with it a cash value, it is more affordable. Guaranteed universal life offers fixed rates throughout the life of the policy, just like term, but is set to expire at a predetermined age of the policyholder, not a number of years.

What is Indexed Universal Life Insurance?

Indexed universal life (IUL) is permanent life insurance, meaning it carries with it a cash value component as well as a death benefit. The difference between an IUL and a standard universal life policy is that you’re invested in a stock-market index. 

While IULs do not come with a fixed rate of interest but instead fluctuate with the markets, still they do possess an interest-rate guarantee against loss.

What is Variable Life and Variable Universal Life Insurance?

Variable life (VL) and variable universal life (VUL) are both permanent life insurance policies and both carry with them a cash value. A variable life policy allows the policyholder to invest a certain amount of the premiums, thus adding to it a certain amount of risk. 

The difference between a Vl and a VUL policy is that the holder of a VUL can increase or decrease the death benefit as they see fit.

Different Types of Life Insurance Underwriting

There are 2 types of life insurance underwriting: simplified issue and fully underwritten. The different types influence the price you’ll pay for coverage and the amount of time it takes to underwrite. Each has its own procedures.

What is Simplified Issue Life Insurance?

Simplified Issue is term life insurance and does not require a medical exam. While there are limitations to the type of policy and amount of coverage, simplified issue life insurance policies are often approved in as little as 15 minutes. Approval is not guaranteed, and often depends upon your motor vehicle record, medical information bureau report and medical prescription report.  

What is Fully Underwritten Life Insurance?

A fully underwritten life insurance policy is permanent life insurance that delves deeper into information gathered from your personal medical and motor vehicle reports. The underwriter may order more requirements, and the whole process can take anywhere from 4 to 8 weeks. 

Additional requirements may include:

• Medical exam by a physician or a paramedical Company
• Doctor records 
• Blood chemistry profile
• Urine sample 
• Resting electrocardiogram
• Treadmill electrocardiogram
• Cognitive screening
• Personal financial statement
• Personal history interview

What is Guaranteed Issue Life Insurance?

Guaranteed issue is permanent life insurance available without a medical exam. Typically, permanent life insurance policies require a medical exam, but because coverage amounts for guaranteed issue policies have lower death benefits, they are exempt. 

Guaranteed issue policies are for those who otherwise might not qualify for standard permanent life.

What is Group Life Insurance?

Group life is term life insurance that has a single contract to cover a whole group of people. Employers or large entities are usually the policy owners and employees and members are covered. The advantage to group life insurance is that the cost per person is much less than if covered individually.

What is Mortgage Life Insurance?

Your house can have life insurance. It’s called mortgage life insurance, and just like the name says, it’s life insurance to protect your home in case of your death. 

Benefits are paid directly to your lender, but it’s your family that benefits indirectly. Mortgage life insurance is a form of term life insurance.

What is Credit Life Insurance?

Credit life is a form of term life insurance and is very similar to mortgage life insurance. Credit life insurance covers large loans held by the policyholder and benefits their heirs indirectly. 

Credit life insurance even pays off creditors if the policy owner becomes disabled. Because of increased risk, credit life insurance premiums are higher than traditional life insurance.

What is Accidental Death and Dismemberment Insurance?

Accidental death and dismemberment insurance (AD&D) is cheaper than traditional life insurance because it limits coverage. It protects your family in the event of loss of life or limb, but only by accident. 

It’s an affordable way to increase coverage by supplementing your already existing life insurance policy. AD&D policies cover:

• Death due to illness 
• Death due to an accident or unnatural causes
• Death due to drug overdose or suicide
• Loss of a limb, sight, hearing or speech
• Loss of use of limbs due to partial or permanent paralysis 

What is Joint Life Insurance?

Joint life insurance is permanent insurance and covers 2 people instead of 1. The catch? Both people must die before benefits get paid. The advantage? Joint coverage is cheaper than buying 2 separate policies.

First-to-die policy

This type of policy means that the benefit gets paid after the first person dies. It’s typically purchased as an income replacement benefit where both policyholders hold jobs. The only drawback is that once the first person gets paid, coverage for the second person then gets terminated.

Second-to-die policy

Also known as survivorship life insurance, this type of policy has the benefit paid out after the 2nd policyholder dies. Payouts go to the policyholders’ beneficiaires. Second-to-die policies are typically used in estate planning.

Comparing Life Insurance Providers

Find Your Life Insurance Policy Today

The right type of life insurance depends on your own personal situation. If you’re looking just for protection, term life has the cheapest premiums with the highest death benefits. Term life policies are perfect as protection against risk for a predetermined period of time, like while your kids are growing up or while you’re in a particular job. They are the most affordable and often require no medical exam.

Permanent life insurance like whole or universal carries a cash value. Permanent policies are more than just protection, they’re an investment. Gains realized in a permanent policy are tax-deferred until time of payout. Permanent life insurance policies are great as investment vehicles for people who’ve already maximized their tax benefits in their IRA or 401(k).

Start with our recommended providers to find your life insurance policy today.

Frequently Asked Questions