The proceeds from life insurance, which are received by the beneficiary free of income tax, can be used for a wide variety of needs. These can include paying off debt, continuing living expenses, or covering the decedent’s funeral and other final expenses. While there used to be a limited number of policy options available, today, there are many different types of life insurance that can be purchased. This variety of options allows individuals to better customize their coverage based on their needs, but it can also be somewhat confusing when shopping for the best policy.
Having a good understanding of the different types of life insurance available in the marketplace today can be helpful in making the right choice.
Understanding Different Life Insurance Options
Today, there are numerous types of life insurance to choose from:
- Level Term Life Insurance
- Renewable Term Life Insurance
- Convertible Term Life Insurance
- Reentry Term Life Insurance
- Final Expense Insurance
- Whole Life Insurance
- Universal Life Insurance
- Variable Life Insurance
- Variable Universal Life Insurance
- Indexed Universal Life Insurance
- Second To Die Life Insurance
When looking at the array of available options, there are just two key categories of life insurance coverage: term and permanent.
Term Life Insurance
Term life insurance provides coverage for a specific period, usually at a lower cost compared to permanent life insurance. It offers death benefit protection only, without any cash value or investment components. Because of this, term life insurance policies are often very affordable and straightforward.
Typically, the amount of coverage will be locked in, as will the premium amount, for the duration of the term insurance policy. It cannot be changed unless the insured chooses to modify it or misses payments, causing the policy to lapse.
Types of Term Life Insurance Coverage
There are several types of term life insurance to consider:
- Level Term Life Insurance: With a level term life insurance policy, the death benefit amount remains the same throughout the entire lifetime of the policy, and the premium paid is typically locked in as well. Term life insurance can be offered through a private plan or a group life insurance policy provided by an employer.
- Renewable Term Life Insurance: A renewable term life insurance policy can be renewed by the policyholder after each “term” or period expires, without needing to fill out a new application for coverage or undergo a new medical examination. However, the premium amount will usually increase at each renewal period due to the policyholder’s increased age.
- Convertible Term Life Insurance: Convertible term life insurance allows the policyholder to convert the term policy into a permanent form of life insurance protection. This can usually be done without proving evidence of insurability or undergoing a medical examination, provided the premiums have been paid and policy conditions met.
- Reentry Term Life Insurance: Reentry term life insurance policies offer low premiums initially, but premiums may increase if the policyholder’s health declines over time. This type of policy is ideal for those who maintain good health and want stable premiums.
- Final Expense/Burial Life Insurance: Final expense insurance, often referred to as funeral or burial insurance, is designed to cover basic burial expenses. It typically offers coverage up to $50,000 and is frequently purchased by those aged 50 and over.
To learn more about term life insurance options, you can explore the following articles:
- What Is Term Life Insurance
- Term vs. Whole Life Insurance
- 10 Year Term Life Insurance
- 15 Year Term Life Insurance
- 20 Year Term Life Insurance
- 25 Year Term Life Insurance
- 30 Year Term Life Insurance
Permanent Life Insurance
Permanent life insurance provides lifelong coverage and includes a cash value component that grows over time. The death benefit amount and premium are typically locked in for the life of the policy. The cash value grows at a common interest rate and can, in some cases, accumulate dividends.
Policyholders can withdraw or borrow from the cash value account, using the funds for any purpose they see fit, such as paying off debt. However, it’s important to note that any unpaid balance in this account will reduce the death benefit paid out to the beneficiary at the time of the insured’s death.
Types of Permanent Life Insurance Coverage
Just like term life insurance, there are different types of permanent life insurance that can cater to varying needs:
- Whole Life Insurance: Whole life insurance is a type of permanent life insurance intended to stay in force for the insured’s entire life, or until the policy pays out. It is the simplest form of permanent life insurance, with a death benefit that remains the same over time and a cash value component that grows by a set percentage determined by the insurance carrier.
- Universal Life Insurance: Universal life insurance offers a level premium and can last much longer than term policies. It has cash components similar to whole life insurance but builds up slowly over time, often to cover premium payments in later years.
- Variable Life Insurance: Variable life insurance is a type of permanent life insurance policy that offers permanent death benefit proceeds to the insured’s beneficiary upon death. This policy includes an investment component where the cash value can increase or decrease based on market performance.
- Variable Universal Life Insurance: Similar to traditional universal life insurance, variable universal life insurance allows the policyholder to invest the cash portion of their policy into different types of investments, such as mutual funds. There is no guaranteed minimum cash value in this type of policy.
- Indexed Universal Life Insurance: Indexed universal life insurance bases the growth of the cash value component on an underlying index, such as the S&P 500 or the DJIA. While the principal can increase during up periods of the index, if the index suffers a loss, the cash value component will simply be credited with a 0%, protecting the funds from market loss.
- Joint and Survivor Coverage (Last to Die): Joint and survivor life insurance policies, also known as “last to die” coverage, insure two lives, often spouses. Benefits are not paid until the second person to die passes away. These policies can be either term or permanent coverage and are often used by couples with sizeable estates to help pay estate taxes or business-related debt.
Which Type of Life Insurance Is Best for You?
Still have questions about a specific scenario or product type? Not sure which one is the best? Contact us today, and one of our representatives will be happy to walk you through all the different products to find the perfect match for you and your loved ones.
Frequently Asked Questions (FAQs)
What is the difference between term and whole life insurance?
Term life insurance provides coverage for a specific period, usually at a lower cost, while whole life insurance offers lifelong coverage with a cash value component.
Can I convert my term life insurance to a permanent policy?
Yes, many term life insurance policies offer a conversion option that allows you to switch to a permanent policy without a medical exam, typically within a specified time frame.
What is variable life insurance, and how does it work?
Variable life insurance is a type of permanent life insurance that allows you to invest the cash value in various investment options. The policy’s cash value and death benefit can fluctuate based on market performance.
Is life insurance taxable?
Generally, life insurance death benefits are not subject to income tax. However, there may be exceptions, such as when a policy is sold or transferred for valuable consideration.
How do I choose the best life insurance policy for my needs?
Consider your financial goals, family needs, and risk tolerance. Consulting with a financial advisor or insurance agent can also help determine the best policy for your situation.
By understanding the different types of life insurance policies available, you can make a more informed decision and select the policy that best fits your needs and those of your loved ones. If you need more personalized advice, don’t hesitate to reach out to our team.
