Life insurance comes in many different policy types. Finding the one that's right for you depends on a number of factors. To help you make the right choice for your family, let's take a look at seven of the most common policy types. Afterward, I'll be happy to help you choose the type that's right for you and your family.
As you shop, keep in mind that life insurance rates vary by person. Life insurance companies need certain information about you to figure out how much of a risk you represent. They need to know your age, sex, state of residence, height weight, health history, family health history, and a few details about your lifestyle (your job, for instance). You’ll provide most of this information on your application, and the rest will come from a free medical exam paid for by the insurer. Next, the insurer will evaluate all this information and assign you a risk class, which determines how much you’ll pay for a policy.
Is there a way to skip the medical exam? Yes! If you buy a “non-med” policy, the insurer won’t ask you to take a medical exam. Instead, they’ll use digital sources of information (like prescription records and your driving record) to assign you a rate. Many more no exam policies are available now, thanks to the pandemic (when many customers weren’t comfortable inviting a mobile medic into their home or workplace for the exam).
Now that you know how life insurance prices work, let’s take a look at the types you have to choose from.
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1. Term Life Insurance
Term life insurance is the most popular and affordable type of life insurance available. It provides your loved ones with a death benefit if you pass away during your policy's term. Terms range from one year to 40 years; popular terms include 15, 20, and 30 years. If you pass away during that coverage period, your beneficiaries can file a claim with the insurer and receive the death benefit, usually 100% income-tax free.
But what happens if you’re still alive at the end of your term? In that case, your coverage ends and there is no payout. Most policies will have the option for you to renew on an annual basis, but this can get expensive. Each year, your cost will go up because you’re now older and present more a risk to the insurance company. If you’re in a pinch and still need coverage, this can work as a short-term solution, but I don’t recommend it. It’s best to buy the longest term you can afford to avoid future price hikes.
The monthly cost, or premium, for your coverage will be fixed for the duration of the term. Because term life is the most affordable type of coverage, it’s the best choice for most of my clients. If you have more complicated needs – like estate planning, wealth transfer, or business coverage – a term life insurance policy can often be a part of the best solution for you, too.
Who is term life best for? People on a budget who want to provide a death benefit for their loved ones after they’re gone. There is no investment component or cash value account. Learn more about term life here.
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2. Whole Life Insurance
Unlike term life, a whole life insurance policy covers you for your entire life. As long as you keep the policy current by making payments, it will never expire. No matter when you pass away, your loved ones will get the tax-free death benefit. Some whole life policies also pay a dividend, which represents a portion of the insurance company's profits made during the prior year.
Like other permanent policies, whole life contains a cash value account. A small part of your premium payment is added to the cash value account, which earns interest. Depending on the size of your policy, this cash value account could be a resource for you if you need extra cash later, once the account has had time to grow. If your policy has a small face amount, like those intended to pay for final expenses, the cash value is intended to go toward the death benefit.
Your cash value account grows tax-deferred and can either be used as collateral to borrow from the insurance company or be directly accessed through a partial or complete surrender of the policy. Keep in mind that a policy loan or partial surrender will reduce the policy's death benefit, and a complete surrender will terminate coverage altogether. You can also pay back the policy loan to replenish the full amount of the death benefit for your beneficiaries.
The main benefit of whole life insurance is the guaranteed death benefit for your loved ones. Because the policy has no term and doesn’t expire, it’s a great way to ensure they get paid after you’re gone. Does whole life insurance cost more because of this benefit? Yes – it’s more expensive than term life. But it’s also simpler than the other types of permanent coverage we’ll go over below.
Who is whole life best for? People who want to ensure their loved ones get a payout no matter when they die. There is no investment component and only minimal cash value. Learn more about whole life here.
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3. Universal Life Insurance
Universal life is another type of permanent coverage with a death benefit and a cash value account. The benefits of universal life insurance are all in its flexibility. A universal policy will generally provide very broad premium guidelines (i.e., minimum and maximum premium payments), but within these guidelines you can choose how much and when you pay premiums. Although you get to choose how much you pay and when, you also have to take responsibility for ensuring your policy stays funded (i.e., you meet the minimum payment requirements). If you’re looking for a “set it and forget it” option, this probably isn’t the policy for you. But if you have fluctuating or seasonal income, the flexibility in payment options could be just what you need.
With universal life coverage, the cost of that coverage increases as you age. Most clients handle that price increase in one of two ways: (1) use their accumulated cash value to pay premiums, or (2) reduce the amount of coverage they have over time. If your kids are grown and the mortgage is paid off, for example, you may need less coverage than you did when you bought your policy. But if you want to raise the amount of coverage, you'll need to go through the insurability process again, probably including a new medical exam, and your premiums will increase.
Who is universal life best for? People who want to ensure their loved ones get a payout no matter when they die, but also want flexibility in terms of how much they pay and when. There is no investment component and some cash value.
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4. Variable Life Insurance
Variable life insurance is a type of permanent coverage that allows you to choose how your cash value account is invested. A variable life policy generally contains several investment options, or subaccounts, that are professionally managed to pursue an investment objective. The goal is to grow your cash value faster than it would with a standard fixed rate of interest, like you’d get with a whole life policy. You can do this by allocating your cash value among one or more subaccounts. Your choices will vary by insurer, but they’ll include things like a fixed interest subaccount or an international growth subaccount (similar to a mutual fund).
So…what’s the catch? With variable life, your cash value component is actually invested in a financial product. Depending on the subaccount, that might be a mutual fund, bond, or index fund. As with all investments, there is a risk of loss. Yes, you have the chance to grow your cash value when that investment performs well. But if it doesn’t, you could lose money.
You’re required to pay at least enough into your variable life insurance policy to meet the minimum fees and expenses. Some clients do this by paying with a lump sum to get started, and adding more money as needed or wanted later. If your cash value grows, you can use this to pay your policy fees. If you don’t keep your policy properly funded, it could lapse – leaving your loved ones without that death benefit.
Who is variable life best for? People who want to ensure their loved ones get a payout no matter when they die, but are comfortable enough with investments and risk to manage their cash value. There is an investment component and potential for loss.
➡️ Is a variable life insurance policy right for you? That depends on your overall financial goals. The best way to find out more is to give me a call. Click the button below to schedule a call!Schedule a Call
5. Variable Universal Life Insurance
Variable universal life (VUL) combines all of the options and flexibility of universal life, with the investment choices of a variable policy. You decide how often and how much you'll pay in terms of premium, within policy guidelines. You’ll be provided with minimum and maximum payment amounts, and as long as you stay within that range, your policy will remain in force. You can also adjust the death benefit amount without having to re-apply for a new policy.
With most VUL insurance, you get no guaranteed minimum cash value, but you can direct how your premium payments are invested among policy subaccounts. It’s up to you to make good decisions that keep your cash value growing as best you can. As with variable life insurance, there is a risk of zero return or loss, depending on how the investments of your subaccounts perform.
Think of it VUL as long-term financial strategy that can help provide extra cash later, for retirement or healthcare expenses. You can access your cash value through withdrawals or policy loans. You can also use it for paying premiums.
Who is variable universal best for? People who want to ensure their loved ones get a payout no matter when they die, and want more flexibility in how and when they pay. You should be comfortable with investments and risk in order to manage your cash value. There is an investment component and potential for loss.
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6. Indexed Universal Life
This type of coverage combines the flexibility of universal life insurance with the ability to allocate your cash value among different subaccounts for potentially faster and higher growth.
What’s the catch?
With indexed universal life (IUL), your money isn’t actually invested in any securities. Instead, your interest-based growth is based on the performance of a market index (like the Nasdaq or S&P 500). If your subaccount’s index goes up, you earn more interest. If it goes down, you earn either zero interest or a token minimal amount set by the insurance company.
Depending on your perspective, this is either just the right amount of incentive to grow your cash value…or not enough. If you hate the idea of risking your cash value – but also want to take some advantage of a rising market – IUL could be the compromise you need.
Who is indexed universal life best for? People who want to ensure their loved ones get a payout no matter when they die, and want more flexibility in how and when they pay. You want some ability to grow your cash value faster than with a low, flat interest rate, but you do not want any risk of loss. Learn more about IUL here.
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7. Joint and Survivor Life Insurance
You and your spouse can choose to buy a single policy of permanent insurance that covers you both. With joint first to die life insurance, the death benefit is paid at the death of the spouse who dies first. With second-to-die, no death benefit is paid until both spouses are deceased.
Second-to-die policies are commonly used in estate planning to pay estate taxes and other expenses due at the death of the second spouse. Other than the fact that two people are insured by one policy, the policy characteristics remain the same. Whether you want a whole, term, or joint universal life policy, I can help you shop for a joint life policy that covers you and your spouse at the same time.
Who is joint and survivor life best for? Married couples concerned with estate planning and passing on the maximum amount of wealth to the next generation. Learn more about survivorship's role in legacy planning here.
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