Struggling to understand the different types of life insurance? Worry no more as you get a fully disclosed read of the 8 most common types of life insurance policies… and discover which is the right one for you.
After deciding to buy a life insurance policy, the next step is to choose the best option for you. Unfortunately, getting a simple-to-understand and detailed explanation of the different types of life insurance that exist isn’t easily found on the web.
That being said…the purpose of this article is to give you an easy, straight-to-the-point explanation of each of the most common life insurance policies… so you can have the knowledge (and tools) necessary to make a good decision.
What Are The Main Differences Between Life Insurance Policies?
The truth is…every policy has its own pros and cons, no matter which one you choose. But there are some key differences you might want to keep in mind as you go through them…
- Premium – (the amount you’ll pay on a regular basis for your insurance)
- Duration – (for how long you’ll be covered)
- Death Benefit – (the payout your beneficiaries will get if you die)
- Flexibility – (depending on the type of insurance, you can request a lower premium or a higher death benefit according to your needs)
- Cash Value – (we’ll talk about it right up next…)
It’s important that you understand what is cash value before moving on, because you’ll find this term frequently as you read.
Some insurance policies offer the cash value feature, which means that a percentage of the premium you pay on a regular basis will go to an accumulation feature that is similar to a “savings account” that you can use for different purposes… maybe to pay future premiums… or to increase your death benefit.
Got that? Alright, that’s all you need to know for now. Don’t worry if you didn’t understand this term at first… as you read on, we’ll make sure you get it right.
Moving on… there are two main types of life insurance, term and permanent.
#1 – Term Life Insurance
The most basic insurance option. For this reason, it’s the most affordable when compared to others.
To give you an idea… a healthy guy in his 20s or 30s could expect to pay a $30-40 monthly premium for a 30-year contract with a death benefit of $500,000*.
How it works:
You pay your premiums as specified in your contract, and if you die, your beneficiaries will receive a death benefit… it could be paid out monthly, annually, or as a lump sum (a one-time payment). Fortunately, there’s no risk of losing your coverage unless you don’t pay your premiums.
However, the disadvantage of term life insurance comes when your policy expires and you need to renew it…
Unlike other insurance policies, term life doesn’t offer a guaranteed cash value (the feature we just talked about) so… the premiums you paid all the way to this point are gone. Now, if you want to renew and extend your policy, your premiums will cost more, because you’re older and naturally have a higher risk of dying.
Despite that, it’s still the generally best option for people who have a tight budget and need a short-to-medium term coverage.
Permanent Life Insurance
The truth is… this isn’t actually a single type of life insurance but a category of options that have the same concept:
They last as long as you pay your premiums, and they offer the cash value feature.
We could say that all permanent options are very similar and don’t need further discussion just to make you read less… but we’d be lying to you. So let’s talk about them and their unique feature – cash value.
#2 – Whole Life Insurance
Are you looking to get covered for the rest of your life and provide for your beloved ones in case you’re dead with little risk?
Then, you might be looking for a whole life insurance.
With it, you’re guaranteed a death benefit for your beneficiaries in case you pass away… and you generally have no risk of losing coverage at all (unlike other permanent policies).
Of course, we’re talking about little to no RISK keeping in mind that you still must pay your premiums… there’s no way to get past them… unluckily.
But hey, good news! With whole life insurance, your premiums will remain the same for the rest of your life.
This option introduces cash value for the first time in this article. As mentioned at the beginning, a percentage of your premiums will turn into cash value, which is similar to a “savings account” where you can earn guaranteed minimum interests with no tax applied until you withdraw the money**. So, it’s a good idea to let it compound exponentially.
Basically, it’s like an account that you can use if needed… and yup… it sounds pretty amazing, but there’s something you should know…
Actually, the premiums you pay are mostly used to cover fees and maintain the death benefit – that means that if you pay $100 dollars monthly as your premium, it’s likely that $95 dollars will be used to cover these fees and only $5 dollars will turn into cash value***.
Additionally, some insurance companies pay dividends to its policyholders!
Whole life insurance can be much more expensive than term life insurance, even though you’re being guaranteed the same death benefit. Still, it’s the most used insurance policy and it can help to build up policy cash value… which can REALLY save your gut during hard times.
#3 – Universal Life Insurance
Like whole life insurance, universal also provides a death benefit and the cash value feature that lets you accumulate and earn interest without tax deductions while the values remain in the policy.
But here’s the new feature: You can choose how much of your premium goes for your death benefit and how much goes into cash value… (without getting a new policy) Remember that you can use your cash value to pay your premiums… or even to go on vacation… but there’s a minimum you have to pay for your death benefit.
Amazing, isn’t it? With some policies, you have the freedom to adjust your death benefit. However, decreasing it might pop up fees… and increasing it might require further client risk assessment called “underwriting” and additional premium.
- Underwriting is the research done by insurers to evaluate the risk and exposure of the potential clients, which determines how much coverage should be given, how much should be charged for the policy, and whether the company accepts the risk to insure them.
IMPORTANT!… we all know that the market can sometimes be your best friend… and sometimes a pain in the butt. Since the interest rate of your cash value depends in part on the market, keep in mind that as you might get good returns, you could also need to pay a little bit more for your premiums to offset a possible loss.
To summarize the differences between term and permanent options, here’s a chart:
Final Expense Life Insurance
There are 2 different options inside a final expense life insurance… simplified issue and guaranteed issue.
Looking for an insurance option that can cover your funeral costs without undergoing a medical exam?
That’s exactly what final expense life insurance is about! All it takes is to answer a simple health questionnaire. Its unique feature? Everything related to your death will be covered… (coverage ranges from $5,000 to $25,000)
Let the costs include:
- Medical Expenses
The con of final expense insurance is its high premium costs compared to the low coverage it offers. However… since this policy only covers people between 50 and 85 years old, it fits perfectly well for seniors who want to take the financial burden of death off their relatives.
Most of the final expense policies turn out to be a simplified issue option… but if you fail the health questionnaire, you’ll be given a guaranteed issue option.
And that’s what we’ll explain next…
#4 – Simplified Issue Life Insurance
Usually, before getting approved for a life insurance coverage, you must undergo a medical exam for the insurer to determine your health and the overall risk they run if they insure you.
For those healthy people who are in a hurry, they’re lucky that the simplified issue life insurance exists, as they don’t need a medical exam to get insured – but a health questionnaire must be answered, though.
It’s a normal health questionnaire… nothing to worry about.
Questions that could come up:
- Do you smoke?
- Do you drink alcohol?
- Do you have a chronic disease?
- Etc, etc..
This process is WAY faster than having to take a medical exam… and for people with poor health, more likely than not they’ll still be asked to undergo a medical exam.
So, basically, this option is for people with average to good health who need insurance as quickly as possible.
What’s the con of a simplified issue life insurance?
It’s more expensive than term life insurances because there’s no way to measure precisely how healthy you are. So, insurers take more responsibility and risk when providing you with insurance.
And even though you might think this option is above your means, remember you can Request A FREE Quote and talk to our expert advisors.
You’ll be given the best insurance options according to your needs and budget. It’s always helpful to get advice from experts in the industry… and much better when it costs NOTHING!
#5 – Guaranteed Issue Life Insurance
Guaranteed issue is an evolution of the simplified issue. Besides not going through a medical exam… you don’t even have to answer a health questionnaire at all. What matters to insurers is that you pay your premiums according to your contract and they know your:
- Province of Residence
Of course, insurers run a holy BIG risk offering this option, but remember…
The less they know about you and your overall health, the more you’re likely to pay for your premiums.
It could be considered a basic law of the insurance industry…
This option is very attractive for any elder with declining health who is easily denied other life insurance options that require medical exams.
Imagine an elder whose funeral might cost a few thousand dollars… he’s looking for a short term option with funeral coverage. Guaranteed life insurance could cost around $200 monthly for a $10,000 coverage, so there’s no doubt it’s a great option for him!
If what you’re looking for is a cheap policy and your overall health is good, you can easily find another option at a better price. If this is your case, the first 3 options we talked about might be of your interest… go and check them out again!
Remember you can talk to an expert advisor for FREE to find an awesome deal… with great benefits… and a good-looking price.
#6 – Group Life Insurance
It’s a type of insurance in which a single contract covers an entire group of people, commonly seen in organizations, where the employer is the policy owner and the contract covers all employees (and sometimes even the employees’ families).
The employer keeps the “master contract” and the employees receive an insurance certificate to prove they are insured.
Group insurance usually comes with a benefits package for employees. Since the employer is responsible to pay for most (or all in some cases) of the premiums, it’s a no-brainer to grab this opportunity.
- Lets you choose your beneficiaries
- Is usually a term contract renewed annually
- Covers 1-2 years of your salary
- Lasts until you’re terminated or the policy expires and isn’t renewed
You might have the option to renew an individual policy if you leave your employer… but more likely than not you can find better options since the premiums tend to be higher than those of simpler policies.
The only reason people do grab this individual policy offer is that they’re denied from other options due to their poor health.
#7 – Travel Life Insurance
Life insurance for travelers might be a great concern, as some policies might not cover any accident or health issue outside the country or state of residence of the insured person.
Fortunately, some policies do offer traveling insurance as an add-on/upgrade for a special price… so you don’t have to buy a completely new policy just to be covered when traveling.
There are 3 types of travel insurance you can get:
- Life Insurance – Accidental Death: This option provides coverage for accidental death & dismemberment (limb loss) during a trip. The payout is given ONLY if an accident occurs. Take note that any pre-condition or previous injuries that get hurt again might not be covered.
- Life Insurance – Common Carrier: Same coverage for accidental death & dismemberment. However, this option is for ticketed public transportation (planes, trains, cruises, ships, buses).
Life Insurance – Air Flight Accident: Coverage for accidental death & dismemberment.
- Life Insurance – Air Flight Accident: Coverage for accidental death & dismemberment during a flight ONLY.nt during a flight ONLY.
If you’re signed up for all of the 3 options listed above and you lose your life or get injured while traveling, your beneficiaries will only receive ONE payout as a lump sum (one-time payment)… they don’t accumulate.
The price of a travel life insurance policy is low compared to the normal term life insurance… and the process of underwriting (assessing risk) is very simple, so it’s very easy to get insured.
Last but not least, all travel life insurance policies are the term, which means they don’t offer lifelong coverage.
Next time you travel, make sure your current life insurance covers your destination, because… as harsh as it sounds… in case of an accident, your family might encounter a big financial disturb… when you could’ve taken that burden off with a few more bucks.
#8 – Critical Illness Insurance
Critical illness insurance pays a one-time lump-sum benefit if you are diagnosed with a critical condition (as defined in the policy) and satisfy the survival period (sometimes 30 days depending on the policy).
Among a vast amount of diseases covered by this contract, the most common are:
Among a vast amount of diseases covered by this contract, the most common are:
- Heart attack
- Organ transplants
- Coronary bypass
- Kidney Failure
- Loss of Limbs
But here’s the full list of critical illnesses and medical conditions covered by the contract.
Due to the extensive medical costs, these diseases require, traditional life insurance can’t be enough to cover the expenses. Basically, if you don’t have a Health Savings Account (HSA) or an emergency fund, you may have a hard time trying to pay the bills.
Owning a critical illness life insurance shouldn’t be a debate here…
The funds it provides in case you suffer one of the diseases listed above are way higher than what a traditional life insurance offers… but these can also be used for disease-related expenses, such as…
Daily living expenses…
Even for vacation, though.
Let’s say there’s a 73-year-old woman called Mary who had previously acquired her critical illness policy… and she just got diagnosed with cancer. She was eligible for a $70,000 dollar coverage, and she was able to treat herself promptly to restore her health within a few months.
Imagine the struggles she could’ve gone by if she hadn’t gotten herself insured for a critical illness. An imminent death and a big economic loss for her relatives might have occurred. But this is just a simple illustrative example to place our minds in a real scenario.
Going back to this insurance description… there are exceptions.
- Chronic diseases aren’t usually covered
- Some types of cancer aren’t covered
- If a disease comes back… or you get a second stroke or heart attack… it might not be covered
Also, an age range might be established in your contract… so just make sure you read the terms accordingly and you shouldn’t have any problem.
This option is also offered as an upgrade for some life insurance policies, which means you don’t have to pay for a completely new one.
Alright, we’re almost done!
Want to get a 40,000 feet view of the differences between the 9 insurance options we talked about in the article?
You’re very lucky to be reading this… here you go!
Now, you already know what are the most common life insurance options in the market, and you have a much clearer idea of which one fits your needs and objectives.
A person is able to talk for FREE to our expert advisors and get the best deal.
So, whether you’re ready to make a decision or not, here’s the link to get advice from our experts in the industry.
For any other questions you have, you can go to our FAQs section, or keep reading the awesome articles we have written for you!