What are the different types of life insurance?
It may seem simple but understanding insurance types can also be confusing. Much of this confusion comes from the insurance industry’s ongoing goal to design personalized coverage for policyholders. In designing flexible policies, there are a variety to choose from—and all of those insurance types can make it difficult to understand what a specific policy is and does.
We’ve broken down a few of the most common types of life insurance policies to simplify things. The best place to begin is to talk about the difference between the two types of basic life insurance: term life insurance and permanent life insurance.
Term life insurance
Term life insurance is life insurance that is only active for a time period. If you die during this period, the person or people you’ve named as beneficiaries get the cash payout of the policy. If you live past the term period, your coverage ends, and you get nothing back. However, many term life insurance policies let you convert them to a whole life insurance policy, so you don’t lose coverage.
Typically, term life insurance policy premium payments (what you pay per month or year into your policy) are not locked in at the time of purchase, so every five or ten years you own the policy, your premiums could rise. The benefit of term life insurance policies is that they’re often a much higher coverage amount than other kinds of life insurances, meaning your beneficiaries could get a lot more money than if you had whole life insurance policy. They also tend to be cheaper overall than whole life, unless you buy a whole life insurance policy when you’re young.
There are also a few variations on term life insurance. One, called group term life insurance, is common among insurance options you might have access to through your employer. This type of insurance provides a base amount of coverage for all employees. This is typically done at no cost to the employee, with the ability to purchase additional coverage that’s taken out of the employee’s paycheck.
Another variation that you might have access to through your employer is supplemental life insurance. Supplemental life insurance can include accidental death and dismemberment (AD&D) insurance, or burial insurance—additional coverage that will help your family in case something unexpected happens to you. You can also purchase this type of insurance individually.
Permanent life insurance
Permanent life insurance simply refers to any life insurance policy that doesn’t expire. There are several types of permanent life insurance—the most common types being whole life insurance and universal life insurance.
Whole life insurance
Whole life insurance is exactly what it sounds like: life insurance for your whole life that pays out to your beneficiaries when you die. Premium payment costs are usually locked in at the time of purchase, meaning the payments won’t change while you own your policy. The younger and healthier you buy, the cheaper your payments will likely be.
Universal life insurance
Unlike whole life insurance, universal life insurance offers more flexibility, specifically when it comes to premium payments, the amount of the death benefit, and the savings/investment portion of the policy. Universal life insurance policyholders can change the amount and frequency of premiums payments, so long as the first premium payment is made. This allows you to build investment savings and have a life insurance policy at the same time.
A variation, called indexed universal life insurance, gives a policyholder the option to divide cash value amounts to a fixed account (low-risk investments that will not be affected by the stock market) or an equity indexed account, such as Nasdaq 100 or the S & P 500. The policyholder has the choice of how much to allocate to each account.
Joint survivorship life insurance
Sometimes, couples will buy life insurance together and share a policy. These policies are called joint or survivorship life insurance and can be either first-to-die or second-to-die policies.
A first-to-die joint life insurance policy means that the life insurance is paid out after the first person dies. For example, John and Mary take out a joint first-to-die policy. John passes away before Mary does, so the policy pays out to Mary and/or other beneficiaries.
Second-to-die means both people on the policy must die before the policy pays out. These are usually used in estate planning so there is enough money to pay estate taxes and other expenses after the death of both spouses. For example, let’s say John and Mary took out a joint second-to-die policy. If only one of them is dead, the policy is still active and doesn’t pay out. Once both of them pass away, the policy will pay out to their beneficiaries.
Variable life insurance
Variable life insurance can be described as permanent life insurance with an investment component. The policy’s cash value can be invested in subaccounts, and this has the potential to grow as the investments in those subaccounts grow. On the other hand, the cash value might decrease if the investments decline.
Mortgage life insurance
Mortgage life insurance is insurance that you still pay premiums to make sure you keep your monthly coverage, but instead of a designated person or persons being the beneficiary of your policy, your mortgage lender is your beneficiary. This ensures your lender is paid the balance of your mortgage if you pass away.
Dependent life insurance
Dependent life insurance is coverage that is provided if a spouse or dependent child passes away. This type of coverage is typically used to off-set expenses that occur after death, so the amount is typically small. Often, people consider this kind of policy to cover a spouse who is not legally separated from the policyholder, or unmarried children, stepchildren, or adopted children of a specified age.
Final expense life insurance
Final expense life insurance is designed to cover bills your family or loved ones might face after you pass away—things like funeral expenses or medical bills. This type of insurance is also called burial insurance. While it may seem strange to take out life insurance for this type of activity, funerals—even simple ones—can have a price tag of several thousand dollars by the time all costs are factored in.
That’s a lot to learn.
Figuring out that you need life insurance is the first step. Now that you’ve learned a little more about all the different types of insurance, things should be a little less confusing. We’re here to help you break through the clutter and learn more about the most popular kinds of life insurance, so you can decide what’s best for you.