Types Of Life Insurance

When shopping around for life insurance, it is important to know there are various policy options—and choosing which is right for you will depend on several personal factors and goals you are trying to achieve through purchasing a policy.

The two categories of life insurance are term and permanent. There are several types of life insurance policies that fit into one or even both of these categories. We'll get into those more in the chart below. 

  1. Term Life Insurance: Policies that last for a specific number of years, such as 10-, 15-, or 20-year terms, and payout to a beneficiary if the insured passes away within that term. If the insured survives past the term limit of the policy, then the policy expires without payout.
  2. Permanent Life Insurance: Policies that do not expire and last for the insured’s lifetime. There is often a cash value that accrues over the life of the loan that can be withdrawn or borrowed while the insured is still living.
Venn Diagram Types of Life Insurance

What You Need To Know About Term Life Insurance

Term life insurance is a policy set for a certain term length. They are commonly issued in 5-year increment terms up to 30 years. If the insured passes away during the policy term, then a payout of the policy limit is distributed to the policy’s beneficiaries. Policy coverage limits can vary—some as low as $25,000, although increments of $100k are more common and can be purchased into the millions.

Types of Term Life Insurance

  • Level Premium Term Life Insurance: Locks in the price of the policy for the entirety of the term. Under these types of policies, the premium is based on the age of the individual when they purchase the policy, so it can be more expensive to purchase if you wait to get life insurance coverage. A person’s health can affect the premium or eligibility to purchase the term life insurance policy, however, usually only after a certain age.
  • Renewable Term Life Insurance: An option for term life insurance policies that guarantees eligibility to renew the policy term after it ends without requalifying. This can be beneficial for those who develop a health issue that may otherwise disqualify them from other policies. The premium of the renewed policy may be more than the original because the new rate is based on your older age.
  • Convertible Term Life Insurance: Another option for term life insurance policies is the ability to convert the policy into a permanent life insurance policy, usually only within the first ten years of the policy. The premium can increase when the policy is converted because permanent life insurance policies are more expensive than term policies, so be sure to do your research prior to making the conversion.
  • Credit Term Life Insurance: A policy that specifically uses the benefit to pay off a lender to cover the costs of debts such as a home loan. The benefit amount typically decreases over time under the assumption that your debt decreases over time as well (from monthly payments). While no medical exam or qualification is needed for these types of policies, they can be expensive.
  • Decreasing Term Life Insurance: While the premium stays level, the death benefit of a decreasing term life insurance policy diminishes over time. Due to the shrinking benefit, the premium on these policies is usually very affordable.
  • Return of Premium Term Life Insurance: This type of term life insurance repays you all or a portion of your monthly premiums when the policy reaches the end of its term, although it can be more expensive than a traditional term policy due to this benefit.
  • Adjustable Premium Term Life Insurance: In this policy, the premium often starts low and then can be increased by the carrier over the term of the policy. There is a maximum amount they can increase the rate to.

What You Need To Know About Permanent Life Insurance

Permanent life insurance policies typically last until your death rather than for a set number of years. Premiums are determined at the time of purchasing the policy and can vary based on age and sometimes even health; however, once the premium is set, it does not change for the life of the policy. The death benefit of the policy also does not change. Permanent life insurance policies can also accrue a cash value that the owner of the policy can withdraw or borrow against.

Types of Permanent Life Insurance Policies

  • Whole Life Insurance: One of the more popular permanent life insurance policies in which the premiums are level, the death benefit is level (and there is a guaranteed minimum), and a cash value can accrue.
  • Universal Life Insurance: More flexible than the average permanent life insurance policy. Premiums can vary and the death benefit can be adjusted but there is a guaranteed minimum. Cash value often accrues at a lower rate than other policies.
  • Variable Life Insurance: The cash value is tied to investments such as bonds or mutual funds. This means how much cash has accrued can vary based on the market, but when it is doing well it often grows at a better rate than other permanent life insurance policies. However, if the market does not do well, it does not have a guaranteed minimum. The death benefit can vary over time but there is a guaranteed minimum.

What You Need To Know About Group Life Insurance Policies

Group life insurance policies can be either term life insurance policies or permanent life insurance policies offered through a workplace benefits plan or an organization’s benefit plan (e.g., a fraternal organization). The policy premium is often far less because there are often many people purchasing a policy—a group rate is essentially offered, and an employer may also help contribute to the costs of the plan.

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