You might already know about the two “big players” in the world of life insurance: term life insurance and whole life insurance. However, did you know that whole life is actually a branch of a bigger type of coverage — permanent life insurance — and there are also several other types of permanent coverage available? Let’s dive in.
- Term Life Insurance
- Permanent Life Insurance
- Underwriting for Life Insurance Policies
Term Life Insurance
Term life insurance is one of the most common kinds of life insurance. It’s often called a “pure” insurance policy because you pay a premium that goes toward the death benefit your beneficiary receives if you die — and that’s it. No bells or whistles, no fancy financial footwork to set up the policy, just pure life insurance.
It’s also the most affordable type of life insurance. Generally, a healthy adult will pay between $30 and $40 a month for the term of the policy — which can be anywhere from 10 to 30 years — or until he passes away. Once the policyholder dies, the life insurance company pays the beneficiary in a lump sum, monthly payment, or annuity. Most beneficiaries take the lump sum.
Permanent Life Insurance
“Permanent life insurance” is an umbrella term used to cover several more specific types of permanent coverage that — as the name suggests — last forever. (“Forever” meaning until the passing of the policyholder.)
While all these kinds of life insurance are similar in that they are permanent, they do have distinct features, so let’s take a closer look.
Whole Life Insurance
Whole life insurance is the most common type of permanent life insurance and the popular counterpart to term life insurance.
Let’s look at some quick facts. Most whole life insurance policies can:
- Accumulate a tax-deferred cash value.
- Offer savings and investment tools.
- Help set up an inheritance for heirs.
Because of these perks, though, whole life insurance premiums also can cost up to 10 times more than term life policies.
Overall, whole life insurance might be the best option for families with much more substantial budgets who have certain financial needs, such as:
- Significant estate planning.
- Providing long-term care to special needs family members.
- Keeping the family business afloat.
Universal Life Insurance
Like whole life insurance, universal life insurance both provides a death benefit and can accumulate a cash value; however, with a universal policy, you can change your premium and the amount of death benefit without buying a new policy. These are especially appealing options if your financial situation changes, but there are conditions to consider.
First, changing your premium basically means using your accumulated cash value to cover the premium or part of the premium. Naturally, this only works if you have enough cash value accumulated to make a difference, and it won’t last forever.
Second, you might have to undergo additional underwriting to increase your policy amount, and fees to decrease it.
Also note that even though these types of changes are big selling points for universal policies, they’re also not as straightforward as they are with term life insurance policies (which also offer them) and can end up being more complex than what most people need.
Variable Life Insurance
Here, the main variable, so to speak, is the cash value component.
When you have a whole life insurance policy, the cash value component acts as a savings account. Usually it grows slowly, but it grows at a guaranteed minimum rate. Also, the insurance company makes dividend payment.
With a variable life insurance policy, the cash value works more like investing. There’s opportunity for high, tax-deferred growth, but it’s risky because you’re more or less putting the cash value on the stock market. Also, you don’t get to choose from a wide variety of mutual funds for investing; you can only invest in the sub-accounts associated with your policy.
So, while the fees can be lower and there’s potential for decent growth, it’s still a significant risk for the average person who just doesn’t have the time or experience to manage it effectively.
Variable Universal Life Insurance
You can think of variable universal life insurance as a cross between variable life and universal life.
With a variable universal life policy, you get the ability to:
- Adjust the premium and death benefit you get with a universal policy.
- Invest the cash value in the sub-accounts you get with a variable policy.
So, while it’s true you get the best of both policies, it’s also true you get the aggravation and risks that come with both policies. Tread carefully.
Final Expense Insurance
The aptly named final expense insurance is life insurance that covers costs associated with your death, such as medical expenses, funeral or memorial service costs, and burial or cremation costs. Typically, they’re attractive to older folks who don’t have the budget or need for other types of coverage but still need help paying for a funeral.
They can be written as simplified issue policies or guaranteed issue policies (see below).
Final expense insurance premiums can be pricey considering the policies usually provide a small death benefit (say, anywhere from $5,000 to $25,000).
Underwriting For Life Insurance Policies
There are two types of underwriting for life insurance policies known as “simplified issue life insurance” and “guaranteed issue life insurance”.
Here are the pros, cons, and target policyholders for both.
Simplified Issue Life Insurance
Simplified issue life insurance is a type of underwriting for permanent life insurance policies, usually final expense policies. It’s designed for people who might not qualify for fully underwritten policies but also aren’t considered high risk.
Applicants don’t have to undergo a medical exam, but they do have to answer a detailed medical questionnaire. However, because there is no medical exam, policyholders can expect to pay a higher premium.
Guaranteed Issue Life Insurance
Also designed mostly for permanent and final expense policies, guaranteed issue life insurance doesn’t require a medical exam or a medical questionnaire; it’s guaranteed for everyone, and applicants are usually higher-risk individuals. Providers base premiums and coverage on the applicant’s age, sex, and state of residence.
Because of this, guaranteed issue life insurance premiums are even more expensive than simple life, and the coverage amount is much lower. Guaranteed issue life insurance is pretty much a last resort for people who sincerely have no other options.
- The two main categories of life insurance are term life insurance and permanent life insurance. Term life insurance is the most common, as it meets most families’ coverage and budget needs, while permanent life insurance caters more to people with significant financial planning needs.
- Additionally, there are several types of permanent life insurance, each one categorized by its own unique options. Of those, whole life insurance is the most popular.
- Aside from fully underwritten policies, people can look into simplified issue and guaranteed issue underwriting methods. A simplified issue life insurance policy doesn’t require a medical exam but does require a medical questionnaire. A guaranteed issue life insurance policy requires neither an exam nor a questionnaire, but is more expensive because of its guaranteed status.