9 Different Types of Life Insurance Policies [Which is Best for You?]

There are various companies offering different types of life insurance policies. Even the best life insurance companies don’t offer all types of coverage. And if you call up a typical agency you are only going to be able to get quotes on a few different policy types, primarily term, final expense, and accidental death. But there are other life insurance types available that you may have never considered.

We are often asked,

“What is the best type of life insurance policy to get?”

And the fact is, there is no one best life insurance policy, but rather, there is a unique life insurance policy tailored for you, based on your specific needs, goals and objectives.

That is why the answer to “which is best” will vary because the best life insurance policy for you may not be the best for your friend or family member. So, with that in mind, let’s explore the different types of life insurance policies available.

Types of Life Insurance Policies

Life Insurance Policy Definitions

It is important to know the characters in the play when seeking out, designing and implementing your life insurance plan. The main definitions to know include: Policy, Owner, Insurer, Insured, Beneficiary, Insurance Premiums, Death Benefit and Cash Value.

Policy: A policy is the binding contract between the owner and the insurer. The insurer is bound to the terms of the contract and cannot cancel the policy except for non payment of premium payments.

Owner: The owner of the policy is the party that enters into the binding legal contract between the owner and the insurance company.

Insurer: The insurer, aka the carrier, aka the company, is the entity that guarantees the terms of the contract. All policy guarantees are backed by the viability of the company issuing the policy.

Insured: the insured is the individual that the policy is covering. The insured is often the same person as the owner, although that is not necessarily a requirement.

Beneficiary: the beneficiary is the person or entity that receives the life insurance death benefit from the insurer upon the death of the insured.

Insurance Premiums: life insurance premiums are the payment due to keep the policy active and in force on the life of the insured.

Death Benefit: the death benefit is the amount of payout that will go to the beneficiary upon the death of the insured, minus any outstanding policy loans. You can decide how you want the death benefit to go to your beneficiary in advance, including as a lump sum, interest only, or as payment over a set number of years.

Cash Value: the policy’s cash surrender value is the amount of money that is accumulating in the permanent life insurance, that can be accessed through surrender of the policy,  withdrawals or used as collateral for policy loans. 

Financial Strength Ratings: Each life insurance company is given financial strength ratings from the four major crediting agencies. A.M. Best, Moody’s, Fitch and Standard and Poor’s are a Nationally Recognized Statistical Rating Organization (NRSRO). Typically the higher the financial strength rating equals the better capitalized the company.

Individual Life Insurance vs Group Life Insurance

When you all consider life insurance, you have two main types to explore: group life insurance and individual life insurance. Group life insurance is typically provided by an employer or an organization. Group life insurance offers you coverage without requiring individual underwriting, which means you won’t need to undergo a medical exam to qualify. Premiums are often lower, and sometimes an employer might cover the cost entirely. However, the coverage amount is usually a standard figure or a multiple of your salary, which might not fully meet your individual needs or preferences.

On the other hand, individual life insurance is a policy that you purchase on your own. This type allows you more flexibility in choosing your coverage amount and life insurance policy type. You’ll likely need to undergo a medical exam, unless you qualify for accelerated underwriting. Your premiums will be based on your age, health, lifestyle, and the coverage amount you choose. Individual policies offer the advantage of being tailored to your specific needs and financial goals, and they remain with you regardless of your employment status.

Credit Life Insurance

Credit life insurance pays a death benefit if the borrower dies. The primary beneficiary of credit life insurance is the lender or the financial institution that provided the loan. An example would be mortgage life insurance whereupon the borrower’s death occurs before the loan is fully repaid, the credit life insurance policy pays out directly to the lender, covering the remaining balance of the loan. This ensures that the debt is settled, and the lender does not incur a loss. It also protects the borrower’s family from the existing mortgage debt.

Different Life Insurance Types

Two Primary Kinds of Life Insurance

There are two primary types of life insurance policies, a permanent life insurance policy or a term life insurance policy. A term life insurance policy does not have cash value while most permanent coverage is also known as cash value life insurance.

But within that framework of term life insurance and permanent life insurance are different types of life insurance policies, ranging from fully underwritten, to automated accelerated underwriting, no medical exam, simplified issue, and guaranteed issue life insurance policies.

In this article we will cover all life insurance plans in the marketplace currently, as well as mention some older types of coverage that have since gone out of production, or at least, are no longer widely sold.

Permanent Life Insurance Policy

As the name suggests, permanent life insurance is designed to last your entire life and usually builds cash value. However, as we will discuss in more detail below, that is not how it always plays out. Ultimately, the type of life insurance you choose will determine how permanent your coverage will be.

Death Benefit and Cash Value

Permanent life insurance provides lifelong death benefit protection. In addition to death benefit protection, permanent life insurance also has a cash value component. This cash value growth feature differentiates permanent life vs term life, which provides only a death benefit.

Another difference between permanent and term life insurance is that the former lacks a definite end date. Permanent life insurance, as the name suggests, is expected to last for the life of the insured.

There are a variety of permanent life insurance types, which we discuss in more detail below.

Whole Life Insurance Policy

Whole life insurance is the most talked about, yet maybe the least understood, permanent coverage available. Whole life insurance has been referred to as “ordinary life insurance” but when properly designed, it is anything but.

Guarantees

Among the most widely known whole life insurance pros and cons are the guarantees. There are three primary guarantees associated with whole life insurance policies. The three guarantees include a guaranteed death benefit, guaranteed level premium and guaranteed cash value growth.

Whole life insurance rates are fixed, providing a level premium that stays the same for the entirety of the contract’s life.

Cash Value

Whole life insurance builds cash value. The cash value grows based on premiums paid, but additional benefits can grow the cash value as well, those being paid up additions and dividends.

Whole life policies guarantee cash value growth. The better performing dividend paying whole life insurance policies may produce an internal rate of return of well over 5% over the long term.

The cash value in the policy grows overtime, which also grows the death benefit.

With the help of life insurance dividends purchasing paid-up additions, it is possible for your death benefit to increase substantially over your lifetime.

The whole life policy’s cash value account grows tax-deferred, meaning that there is no tax on this growth until it is withdrawn above the basis from the cash account.

Loans

In addition to tax deferred growth in the policy, an option to avoid a taxable event is to take out a life insurance loan. When you take out a whole life insurance loan, you are borrowing from the insurance company using your cash value as collateral.

Participating vs Non-Participating

Some types of whole life insurance, called participating whole life, pay dividends to policyholders. These dividends are categorized as return of premium to the owner of the policy, so they are not subject to taxation. Dividends can be used as cash, pay premiums, pay back loans, buy term insurance, or purchase additional paid-up insurance. In contrast, a non-participating whole life insurance policy does not pay dividends.

Limited Pay

Lastly of note, limited pay whole life insurance is available. You can choose to pay your premiums for a specific period of time, such as 7-Pay, 10-Pay, 20-Pay, to age 65 or to age 100. Once the payment period has been fulfilled, the policy is considered paid-up. And with a participating whole life policy the cash value and death benefit continue to grow even though no more premiums are due.

Universal Life Insurance

Universal life insurance features a death benefit and cash value account like whole life, however it offers greater flexibility than whole life in two distinct ways.

One way is the flexible premium payments. This is due to the ability of a policyholder, within limits, to select the amount of the premium that will be devoted to the policy’s death benefit and the amount that will be contributed to its cash value account.

And universal life insurance policies often provide you with the flexibility to skip payments if there is enough cash in the cash account to cover your premium payments. This option should be used with caution; if there isn’t enough money in the cash account to make payments the policy may lapse.

Also, as permanent insurance, the cash value account in universal life policy grows tax-deferred and can be accessed by the policyholder in the form of loans or withdrawals, subject to any applicable policy provisions.

Guaranteed Universal Life Insurance

Guaranteed universal life (GUL) is the easiest to understand universal life insurance policy. It is a great option for someone looking for lifelong death benefit protection at the lowest cost. Guaranteed universal life insurance is able to do this at the expense of the cash value, which is going to be lower and grow at a slower pace than the cash value in other life insurance policies.

No Lapse

It is called guaranteed universal life due to the no lapse provisions in the policy. These no lapse guarantees provide the universal life policy will not lapse as long as the premiums are paid. The no lapse guarantee may not be included for the entire duration of the policy, so make sure you understand the fine print.

Guaranteed universal life insurance policies can be structured to last until ages 90, 95, 100, 105, 115 or 121. However, the only true permanent coverage is the GUL to age 121. With the other types of guaranteed universal life you risk the policy expiring before you die if you outlive the coverage end date.

Indexed Universal Life Insurance

Indexed universal life (IUL), features a linkage between the cash value of the policy and a stock market index such as the Standard & Poor’s 500, Nasdaq, DJIA, Russell or even international indexes such as the Hang Seng, EURO STOXX 50, or MSCI Emerging Markets.

The gains you receive from this connection between your IUL policy and a specified index are determined by a formula contained in the policy, which includes your participation rate, cap rate and floor.

There are many IUL insurance benefits to consider. For example, IUL policies offer you the opportunity to receive returns linked to the stock market, while typically limiting any downside apart from fees. This allows you to participate in the market’s upside, often with a cap limiting how much you can make in any one year, while avoiding negative stock market returns.

Participation Rate

The percentage of the index’s gain that you will benefit from is determined by the policy’s participation rate. For instance, if the market rose 16% and your indexed universal life insurance policy featured a 75% participation rate, your cash account would see a 12% gain (75% of 16%).

Cap Rate

If the policy features a cap rate, this limits the growth of your cash account in any one year regardless of the participation rate. For instance, if the IUL insurance policy in the example above had a cap rate of 10%, your return would be capped at that level rather than the total gains of the index your policy follows.

Floor

If the market were to fall, on the other hand, IUL policies often limit any losses with a set guaranteed floor. Thus, if the market fell 10%, for example, your cash value account would not lose 10%, but would instead realize a 0% return for the year unless the policy offered a minimum yearly return guarantee.

IUL Loans

As with other types of permanent insurance, you can access the cash value account in an IUL policy via withdrawals and loans. You can also select how much of your premium goes to the death benefit or cash account or use the cash account to pay premiums as with a traditional universal life policy.

Variable Life Insurance

Variable Universal Life (VUL) offers similar features to other universal life policies, such as flexible allocation of premium payments.

Investment Options

The additional benefit with variable universal life insurance is that the policyholder has a variety of investment options to choose from. These can include a fixed account and equity options such as mutual fund-like investment sub-accounts in which your cash account can be invested.

As a result of the investment portion, a life insurance agent needs to possess both a life insurance license and a securities license as a registered representative with the Financial Industry Regulatory Authority (FINRA)  to sell a variable insurance policy.

Risk vs Reward

The opportunity to invest in markets gives the cash account in VUL policies the potential for greater returns than a typical whole life policy by investing in equity-linked investments, but also makes them subject to greater risk due to the volatility associated with the stock market.

The death benefit of Variable Life insurance policies may rise or fall, but it will not decline below the specified guaranteed amount. This amount is typically the death benefit amount that was purchased at the policy’s origination. There is generally no minimum guaranteed cash value associated with VUL policies.

Asset Based Long Term Care Life Insurance

Introduced over the last few years, long-term care life insurance is a hybrid policy. Also known as asset based long-term care insurance, you can choose life insurance mixed with long-term care insurance as an alternative to traditional pure long-term care insurance.

With hybrid long-term care life insurance policies you get a death benefit payout along with the option to use the policy if you are faced with the need for qualifying long-term care services.

Fixed Premium

And unlike traditional LTC insurance policies, the premiums on the hybrid policies are fixed. This is a great feature, as many older LTC policies have rising premiums, making it difficult for policyholders to keep the policy in force.

First to Die Life Insurance

Although there are a few life insurers that offer first-to-die life insurance, it is no longer as popular as it once was. The basic idea behind first to die policies is it covers the life of two people. The life insurance company pays out the death benefit after the first person dies, so the survivor has money to cover expense, such as burial costs, pay debts, pay bills, etc.

Survivorship Life Insurance

Survivorship life insurance policies cover more than a single individual. They can be designed in several ways. One approach is to set up such a policy as first to die. This type of life insurance coverage ensures that the death benefit will be paid out upon the first person’s death.

Last to die insurance survivorship insurance, also known as joint and survivor, can also be purchased. Policies of this type can be purchased as term or permanent insurance.

Generally, survivorship life insurance policy premiums are higher than would be the case with a policy with just a single insured. However, purchasing a survivorship life insurance policy is often less expensive than buying two different life insurance policies.

Additionally, there may be less stringent life insurance underwriting criteria for such policies, especially in cases where one of the insured individuals is in good health, compensating for the other insured whose health may be anything but good.

Term Life vs Permanent Life

One of the best examples for contrasting term life vs permanent life insurance is the concept of owning your home versus renting.

Renting

Term life is similar in some regards to renting a home. You pay money into the policy like you would pay a landlord. At the end of the term or the lease, you need to renew the lease or move out. Overtime, the lease will increase, just as the term life rates will increase. And all the money you are paying the landlord or the insurance company is never seen again.

Owning

Alternatively, with permanent life insurance, it is like owning a home. As you make premium payments, the equity in your home builds, similar to the cash value in your policy.

Initially, the equity builds slow because you are paying down more interest than principle. Similarly, your cash value builds slower at first as your start-up fees and costs take more of your premium.

However, over time your equity builds and you can access your equity via a cash out refinance or HELOC. Similarly, you can access your policy’s cash value via withdrawals or loans.

Where this analogy comes up short is that with home equity, you still have to apply and be approved by the bank to touch your equity. However, your cash value in your permanent policy is available whenever, and for whatever, you want.

Term Life Insurance Policy

Among the different term life insurance types are level term life insurance, convertible term life insurance, return of premium life insurance and decreasing term life insurance.

First, a little about a term life policy in general.

Less Expensive

Term insurance is heralded by most in the media and financial world as being the better option because it is less expensive than whole life. In fact, you have probably heard it said to buy term and invest the difference.

Just be aware that term life premiums get very expensive as you age. And as you age when you need coverage the most, the term policy is too cost prohibitive.

This leads people to making poor financial decisions, such as buying final expense insurance, when they could have purchased permanent life insurance while younger and saved themselves the disappointment.

Pure Death Insurance

Term life insurance types are designed strictly to pay out a death benefit. A term policy can be considered “pure life insurance”. It could also truly be called “death insurance”, since term life insurance does not build cash value and its primary purpose is to pay a death benefit when the insured dies.

Cheapest

Term life insurance is the most affordable type of life insurance you can buy, and often appeals most to younger people in good health who are looking for peace of mind to cover loss of income or a mortgage.

The Term

Term life is purchased for a certain period of time: for instance, 5, 10, 15, 20, 25, 30 with some carriers offering up to 40 year term life insurance policies. In addition, some carriers offer a 1-year renewable term life option.

Renewable

Once your term expires the policy is renewable to a specific age, such as 95 years old. However, the term insurance premiums will increase each year, making term life insurance extremely cost prohibitive later in life.

Alternatively, some companies keep your premium the same, but lower the death benefit. Eventually the death benefit will decrease to around $10,000, at which time the term life rates begin to increase.

Either way, the main point is a term life policy is temporary. Do not expect to die with term in force, since 99% of policies expire without paying a death benefit claim.

Level Term Life Insurance

Most term life policies feature level premiums for the life of the policy. A level term life policy provides a fixed premium. However, be aware that some companies will offer “level” term life, only to raise the premiums every five years. The only thing that is truly “level” with these term policies is the death benefit, which is why you need to read your policy’s fine print.

Retaining term coverage after your level term life policy expires will typically cost more as you age and your health declines. As a result, some term life policies feature an option to convert the coverage into permanent life insurance within certain parameters.

Convertible Term Life Insurance

Convertible term life insurance is typically a normal level term policy that has the option to convert the policy into permanent insurance by the end of the term or by a specified age, such as 70.

The advantage of convertible term insurance is you can convert all or a portion of your death benefit to permanent coverage without having to prove your insurability, in other words, you don’t need to take a medical exam or answer health questions.

At I&E, we strongly recommend anyone considering term life to also consider the types of policies the term can be converted into. Not all permanent life insurance is created equal, so choosing the best cash value life insurance company from the start is very important if you plan on converting your policy down the road to any worthwhile permanent coverage.

Return of Premium

Life insurance classified as return of premium (ROP) features a return of premiums paid to purchase coverage if the insured outlives the term of the policy, or payment of some portion of premiums paid to the beneficiary upon the insured’s death.

An example would be if a $500,000 policy was purchased with payments of $5,000 a year for 20 years. After the 20 years was up if the policyholder was still alive he or she would be refunded $5,000 x 20 or $100,000.

Such a payment would be considered return of premium, or return of principal, rather than a payout of earnings, and therefore not subject to taxation.

ROP policies offer you a chance to hedge your bets, providing insurance protection for your loved ones during the term of the policy, while providing you with the ability to regain the money spent on insurance premiums if you outlive the policy payment period.

ROP policies were more popular in the past, but due to higher costs associated with the policies most life insurance companies no longer offer the ROP option.

Decreasing Term

A decreasing term life policy (aka mortgage life insurance) features a death benefit that declines over time, even while the premium typically stays the same. Such policies terminate when the death benefit falls to zero.

Decreasing term policies are often used to provide coverage for the balance of a mortgage loan. As the mortgage balance declines, the mortgage life insurance coverage also falls until the mortgage is paid off and the insurance is no longer needed.

Fully Underwritten

Most life insurance companies require a life insurance medical exam. However, there are a few innovative companies that are using other means to gather the necessary data needed to make an informed decision on whether or not to approve an applicant.

A fully underwritten exam includes a paramedical exam. The exam includes a blood draw, urine sample, height and weight measurements and additional health questions and lifestyle questions.

No Exam Life Insurance

No exam life insurance does not refer to a specific type of coverage but to the underwriting requirements of the policy. No exam life insurance can refer to both accelerated underwriting or simplified issue.

You can even qualify for no exam permanent life insurance from innovative companies, such as Penn Mutual, which offers up to $5 million in no exam life insurance coverage.

Accelerated Underwriting

Automated accelerated underwriting is a new category that was first introduced a a handful of years ago. One of the earliest innovators was Principle Financial, but many companies have followed its lead, with Penn Mutual being one of the latest and greatest.

Accelerated underwriting is a hybrid of fully underwritten and no exam life insurance. It truly is still fully underwritten in that there is a thorough application covering your health and lifestyle, a back ground check consisting of the Medical Information Bureau (MIB), a Prescription Database Check and a look at your Motor Vehicle Record (MVR). But for those who qualify, you may not have to take a paramedical exam. Still others might be able to bypass certain paramedical requirements, such as the blood draw and urine sample.

Qualifying for no exam coverage for permanent life insurance policies will typically hinge on your background check and if anything pops up that might cause the insurance underwriter to want additional information.

Simplified Issue

Simplified issue life insurance doesn’t require a medical exam in the underwriting process. Depending on the type of simplified issue policy, some questions, or perhaps only a few questions about your health will be asked of you, and you will then be accepted or denied based on your answers.

Generally, simplified issue life insurance starts around $25,000 and maxes out around $250,000 worth of coverage.

Final Expense Insurance

Also known as burial insurance, final expense life insurance is generally purchased by people in the 50 to 85 age range, although those above this age range can usually find some insurance companies willing to sell them a policy.

Final Expense insurance is aimed at people who want to provide funds to pay for the cost of a funeral, memorial service, and other such costs associated with their death. These expenses can easily run to $10,000 and more, which may not be easily affordable for many families.

Final expense insurance coverage can be permanent as well as term, and underwriting such policies is generally not difficult, making them available to older applicants as well as those in poor health. Individuals who might not otherwise qualify for life insurance but still want to provide funds to pay for their final expenses often buy this type of life insurance or guaranteed issue. 

Guaranteed Issue Life Insurance

Guaranteed issue life insurance dispenses with health questions altogether and ensures that you will get coverage as long as you meet the age requirements and live in a state where the guaranteed issue policy is sold.

Both simplified issue and guaranteed issue life insurance types of coverage are more expensive than going through the standard underwriting process, which includes a medical exam, with guaranteed issue typically being more expensive than simplified issue since no health questions are required.

If you don’t believe you are likely to pass a medical exam or prefer not to take one, simplified issue or guaranteed issue may be your best option.

Accidental Death and Dismemberment

An accidental death and dismemberment policy pays out a death benefit if you die due to a qualifying accidental death or if you are dismembered, such as losing your arms or legs. And there are percentages offered if you suffer from the loss of only one limb. In addition, some ADD policies offer additional coverage for loss of sight, hearing, etc.

Accidents Only

A pure accidental death insurance policy pays out a death benefit if you die due to a qualifying accidental death. But note, accidental death insurance only covers you for qualifying accidents. There are many exclusions and limitations in the policy, such as committing a crime or driving while intoxicated.

The most importance point is these life insurance policies do NOT cover you for natural causes, such as cancer, heart disease, diabetes, or stroke.

Conclusion

In the end, having the best life insurance policy for you, one that meets your unique needs, goals and objectives, is the key to true peace of mind. At I&E, we will take the time to walk you through the various policies available to you and help you select the policy that best meets your needs.

So what are you waiting for? Please give us a call today for a complimentary strategy session to discover what is the best life insurance policy for you.