While there are numerous variations, there are essentially two primary types of life insurance in the marketplace today. These are term and permanent.
Term Life Insurance
Term life insurance is considered to be pure life insurance coverage. This is because it offers pure death benefit protection, without any type of cash value build up or underlying investment component.
This type of insurance has a specific length of coverage duration such as 5, 10, 15, 20, 25, or 30 years. Once the time period in a term life insurance policy has elapsed, the insured will need to renew the policy if they wish for their coverage to continue. At that time, the premium for the renewed coverage will be based upon their then-current age.
Term life insurance policies typically have lower premiums than permanent life insurance policies with a comparable amount of coverage. This is especially the case for insureds who are young and in good health. The lower premium amount is due primarily to the fact that premiums are going only towards the death benefit coverage and not into a cash or investment component.
There are many different types of term life insurance policies. These can include:
- Level Term – Level term life insurance policies have a death benefit that stays the same throughout the entire duration of the policy. The premium will also typically remain the same as well.
- Increasing Term – With increasing term, the amount of the death benefit will increase over time, even though the amount of the premium payment typically stays the same. This type of benefit can oftentimes be purchased as a cost of living rider to a whole life insurance policy.
- Decreasing Term – On a decreasing term insurance policy, the death benefit will decrease each year, and the policy will end when the amount of the death benefit reaches zero. These policies are oftentimes used when an insured wants to cover the remaining balance of a home mortgage over time.
- Renewable Term – A renewable term life insurance policy can be renewed by the insured at each renewal period without the need for the insured to take a medical exam. It is likely, however, that the premium will still increase at the time of renewal due to the insured’s increased age.
- Convertible Term – Convertible term policies will allow the insured to convert from a term life to a permanent life insurance policy at a date in the future without the need to take a medical exam.
Permanent Life Insurance
Permanent life insurance policies can be purchased and kept for a person’s entire life. As their name implies, these policies are permanent, and they therefore do not expire after any certain time period or term.
In addition to providing death benefit protection, permanent life insurance policies also offer either a savings or investment component. Because of this, however, the premiums that are charged for these policies are typically much higher than those on a comparable amount of term life insurance coverage.
There are many different variations of permanent life insurance policies. These can include:
Whole Life Insurance
Whole life insurance contains two primary components – a death benefit and cash value. The death benefit on a whole life insurance policy is usually guaranteed. The amount can be set, or it could increase over time – although an increase could also cause the amount of premium to increase as well.
The cash value inside of a whole life policy is allowed to grow on a tax deferred basis. This means that no tax is due on the gain until the time it is withdrawn. This can be advantageous in that it can allow the cash to increase on an exponential basis over time.
Initially, however, the cash within a whole life insurance policy tends to grow quite slowly. This is because a majority of the funds in the early years of the whole life policy go towards paying for commissions and other policy fees. Over time, however, the cash will begin to grow steadily and it will usually offer a minimum guaranteed rate of return to the policy holder.
Universal Life Insurance
Universal life insurance is considered to be a more flexible type of permanent life insurance that provides the low-cost death benefit of term life coverage in conjunction with a savings component that is invested to offer the policy holder a cash value build up.
The policy owner of a universal life insurance policy is allowed to change, within limits, the death benefit, as well as the timing and the amount of their premium payment. Each time that a premium payment is made, the insurance company will deduct a certain amount to cover the cost of the insurance, while at the same time crediting another portion of the payment to the policy’s cash value account. In essence, a universal life policy owner can decide how much of the premium will go towards each of the policy’s components.
As an example, if the cash portion of the policy isn’t earning a high return during a certain time period, the policy owner may opt to use more of their premiums for paying for death benefit coverage as versus putting money towards the cash value component of the policy.
Guaranteed Universal Life Insurance
Guaranteed universal life insurance offers a relatively new type of coverage that features guaranteed coverage for as few as 20 years or up to the insured’s age 120. It also offers a variety of different policy riders. Just as with regular universal life policies, these plans are very flexible and adjustable in order to fit changing needs.
For example, sums of money can be transferred into the policy in order to reduce premium payments. Likewise, additional premium payments can be made early in the policy years in order to reduce the total number of payments that are needed overall throughout the life of the policy.
Indexed Universal Life Insurance
In addition to providing a death benefit, indexed universal life insurance credits interest to a cash value component that is based on the performance of an underlying index such as the S&P 500. This can provide an opportunity to build up a substantial amount of cash over time.
However, because the indexed account is not an actual security or direct investment in the stock market, it is able to offer the policy holder the upside potential of the underlying equity market – yet without the downside market risk. This means that the policy holder’s account is allowed to grow, but at the same time it is protected from the negative volatility of the market. Therefore, the account will never lose value due to negative performance during a given year.
Variable Life Insurance
Variable life insurance policies offer a death benefit component and an investment component. With these policies, the death benefit may increase or decrease, however, it will not go below a guaranteed minimum amount. This is usually the original amount of death benefit that has been purchased.
Investments that can be chosen include a variety of stocks, mutual funds, and other types of financial vehicles. The investment component of the policy is subject to the fluctuations of the market. So, while the underlying investments can offer the opportunity for nice growth, these plans are considered to be risky, too, as they can sustain losses as well.
Variable Universal Life Insurance
Variable universal life insurance is somewhat similar to traditional universal life insurance, except that the policy holder is able to invest the cash portion of their policy into different types of equity investments such as mutual funds. There is also no guaranteed minimum cash value in a variable universal life policy.
Final Expense Life Insurance
Final expense is a type of life insurance that covers the cost of burial, a funeral, and other related expenses. Oftentimes referred to as “burial insurance” or “funeral insurance,” final expense typically provides a death benefit of between $5,000 and $50,000 – although some policies provide more.
This type of coverage is often underwritten as either guaranteed issue or simplified issue. A policy that is underwritten as simplified issue only requires that the applicant is asked questions about their health and medical condition, but they are not required to take a medical exam in order to obtain coverage.
With a guaranteed issue, the applicant will not be asked any medical questions at all for underwriting purposes. Therefore, anyone who applies will generally be able to obtain coverage. Because of this, however, the premiums on these types of policies are usually higher, and you typically need to outlive the first two years of policy for the death benefit to be in effect.
Life Insurance Settlement Options
When the insured on a life insurance policy passes away, the named beneficiary (or beneficiaries) is entitled to the death benefit proceeds. Within the life insurance policy contract, the insurance settlement options refer to the manner in which these funds may be paid out to the beneficiary. Typically, there are several different settlement options that are available.
In many instances, beneficiaries will choose the lump sum payout. This occurs when the entire amount of the proceeds are paid out at one time in a single payment. Going with this option can oftentimes help the beneficiary in paying off large expenses such as funeral and burial costs, as well as other final debts of the deceased. These funds may also be used to replace the decedent’s income in helping survivors to pay ongoing living expenses going forward.
If beneficiaries would prefer not to receive the entire amount of the death benefit proceeds all at one time, there are other settlement options that may be chosen. Some of the most common of these can include:
- Interest Income Option – With the interest income option, the insurance company retains the funds and pays a stated amount of interest on the money. This interest may be paid out on a monthly, quarterly, semi-annual, or annual basis. When choosing this option, the beneficiary may have the ability to withdraw part or all of the proceeds when desired.
- Life Income Option – The life income option is similar to an annuity. When choosing this settlement option, the policy’s beneficiary will be guaranteed to receive an income for the remainder of his or her life – regardless of how long that may be. The actual amount of that income, however, will be dependent upon the amount of the policy’s death benefit, as well as the age and gender of the beneficiary, as these are factors in the income recipient’s life expectancy.
- Joint and Survivor Life Income Annuity Option – With the joint and survivor life income annuity settlement option, the beneficiary will be allowed to annuitize the death benefit proceeds payments based upon two or more individuals’ lives. This means that the payments will be based upon the amount of the death benefit proceeds, as well as the life expectancy of the beneficiary who is expected to live longer. The payment of the proceeds will therefore continue to pass from one beneficiary to the other until the last beneficiary has passed away.
- Specific Income Option – If the beneficiary chooses the specific income option, he or she will receive an equal amount of income each year for a certain number of years until all of the death benefit proceeds have been paid out to them. With this policy settlement option, another individual can be chosen to receive the remainder of the payments until all proceeds have been paid out.
- Fixed Period and Fixed Amount Options – The fixed period option will pay both an amount of principal and interest to the beneficiary over a certain stated period of time. Should the policy’s beneficiary pass away before the entire amount of the policy’s proceeds have been paid out, then the remainder of the money will be paid to the contingent beneficiary that was named in the policy.
With the fixed amount settlement option, the proceeds will be paid out in a fixed amount over time until both the principal and the interest have been completely paid out to the policy’s beneficiary. When using this particular option, the payment recipient has the ability to either increase or decrease the amount of payment – and if they choose, they could also even change over to a different settlement option altogether.