What are the different types of life insurance?
This is a crucial question when you want to choose the best life insurance products for your needs and budget.
Do you know the difference between the two main types? Do you know what is term life, permanent, whole life, universal type, their benefits, pros and cons, and etc.?
If the answer is NO, here you will find them simple explained in details with chart and infographics in PDF.
This will help you to make a comparison between the variety of plans, coverages, and policies available on the market.
For your convenience the page is divided into following sections:
The Two Main Types Of Life Insurance
When you buy life insurance, you sign a contract with an insurance company. The company has to provide your family or other beneficiaries with a certain amount of money in case of your death.
In return to this, you make premiums (periodic payments) to the company.
What Are The Main Life Insurance Benefits?
After your death, your family member/ members can use the returns to cover different types of expenses such as mortgage payments, college tuition, funding a child’s education, and many others.
- Term life insurance offers protection for beneficiaries for a certain time period —comonly from 1 to 20 years. Term policies pay benefits to your family only if you die during the period covered by the policy.
- Permanent life insurance does not expire. It aims to protect your beneficiaries permanently as long as you’re paying premiums. Also, there are policies that can accumulate money as a cash value. Permanent life insurance is further divided into whole, universal and variable. The most popular subtype is whole life insurance.
Whole life is the most common type of the permanent coverage, so the two main types are more known as whole life and term insurance.
Whole Life Insurance: Explanation, Benefits, Pros and Cons. Who Needs It?
What is Whole Life Insurance?
It is a form of permanent life insurance. The main purpose is to provide protection over the police holder’s entire life.
In other words, the whole life insurance covers you for your whole life, in the condition that you pay your premiums.
Whole life insurance provides not only death benefits, but also comes with an additional option that is called “cash value“.
What Is “Cash Value”?
Cash Value is an investment and savings component to whole life policies. The police accumulate “cash value” that the insured individual can withdraw or borrow against.
Some of the money you pay in premiums accumulates as a cash value. It is one of the main elements of whole life insurance. With this in mind, you can think about the whole life insurance policy such as a type of investment. Your insurance premiums earn interest over the life of the policy.
You can use cash value for many purposes: to save for retirement, to borrow money for paying a loan or to cover some of your children education and etc.
Whole life policies have many pros that term life cannot provide and some cons that term policies do not have. Knowing the benefits and disadvantages of whole life insurance type can help you make a decision if this is the right type of life insurance for you.
Whole Life Insurance Benefits and Advantages:
- Protection For Life – once whole life coverage has been issued, it cannot be canceled (excluding cases of non-payment or fraud).
- Fixed Premiums – you pay a level and predictable premium. There is no unexpected increase in the amount of the premiums you have to pay. It is easier for you to budget and to make financial plans. Even if you become gravely ill, the cost never changes.
- Cash Value provide also important advantages. For instance, you have the ability to borrow against the cash value of your whole life policy. (let’s say that you are in need of cash to pay for children education, you can borrow money from the cash value).
- Guaranteed Death Benefit – the amount that your family will receive in case of your death, is guaranteed.
- Dividends: Some whole life policies can pay out dividends from your insurance company’s profits. You can use this money for different purpose such as: purchasing additional life insurance, reducing your premium payments, accumulating interest, and etc . Please, be warned that dividends are not guaranteed.
- Tax Deferrals: In many cases, whole life coverage can help you cut your family’s tax bill (for example you can cut particularly inheritance tax (IHT)). However, tax planning is a very complex area with changeable rules. The best practice here is to consult a specialist before putting whole life insurance in trust.
- Higher Costs – this is considered as the main disadvantage of the whole life type of insurance. Premiums can be as much as 5 times (and more) higher than term life premiums for the same amount of coverage. Because whole life coverage is for entire life and includes a savings component, insurance companies typically have to charge more.
The general rule here is: the older an insured person is, the higher the insurance costs. The younger you are (and the better health you are in), the cheaper the insurance cost.
- More Complexity: policies are more complex than term policies, which can make it more difficult to compare different plans and products. Added features, options, and benefits to policies make it more complex to understand and to estimate. It is vital to have a clear understanding of your insurance needs and priorities in order to make the right decision.
- Low-Interest Rates. As we mentioned above you earn interests from cash value or dividends with some whole life policies. However, the interest rate you earn can be significantly less than if you invested it on other interest accumulating investments. After all the whole life insurance is not about the investments, it is about the long life coverage.
- High fees and commissions for insurance companies.
- Not Flexible Polices. If you searching for maximum flexibility, the whole life type of insurance may be not for you. There is no possibility for you to know important facts about your account, such as the percentage of your monthly premium used for cash accumulation, the percentage that is applied to your death benefits package and more.
Download the next infographic in PDF that sums the pros and cons of whole life insurance type:
Who Needs Whole Life Insurance?
The decision to purchase whole life insurance is your personal choice and depends on many factors such as your finances, your coverage goals, age and knowledge about insurance.
Factor 1: The Cost
Of course one of the main factors here is the cost. Whole life policies are much more expensive than term policies for the same amount of coverage.
Although cost is a very important factor, the main decision is driven by your life insurance needs.
Balancing need with cost is the key, no matter what you buy!
If you have a high-income and you have no knowledge about investment opportunities, whole life insurance may be a good decision for you. The higher premiums of whole life bring a cash value which increases each year.
Be aware that there are many more profitable ways to invest your money. However, if you have no any investment knowledge and do not want to learn it, whole life policy may worth to consider.
Also, keep in mind that to build up enough cash value to make it worthwhile, the policy needs to be held for many years – for example – 20 years.
Factor 2: Health Issues And Age
Whole life policies may be also a good choice for people who have some types of health issues that could lead to “un-insurability” as time goes by.
There is a good point for any life insurance type that will support your family when they need it the most.
Another important factor here is the knowledge of your family’s medical history and hereditary conditions that begin to affect you. It definitely can influence your decision to purchase a policy.
Factor 3: What Is Your Goal? Is It Lifelong Coverage?
What is your goal, what do you want to achieve with your life insurance policy?
Whole life is a good solution for people who aim lifelong coverage. This type of insurance provides you with guarantees and safety. And if you want a protection for life, whole life products worth to consider.
The process of deciding to buy whole life insurance (or not) is a complex process with many options in an unknown territory. It is a good idea here to consult a trusted agent or specialist with deep knowledge in the area.
How Much Does Whole Life Insurance Cost?
The costs will vary depending on your personal profile and the life insurance company you want to buy a policy from.
Anyway, there are some main factors that determine costs for whole life policies (as well as the other types of insurance):
- Age: Normally, life insurance rates increase as you age. The younger you buy permanent life insurance, the more affordable it will be for you.
- Health: The healthier you are, the more affordable insurance will be. This is because you are a smaller risk for the insurance company.
- Do you smoke?: Generally, people who smoke pay considerably more for life insurance. (One more reason to quit smoking :->).
- Your lifestyle: Are you live a hazardous lifestyle or a healthy lifestyle? It is obvious that If you live a healthy lifestyle, your life insurance rates should be cheaper.
- The medical history of your family: If your family has a history of cancer or other serious diseases, you may have to pay higher premiums.
- Occupation and hobbies: A teacher? Sky diving instructor? Do you have any dangerous hobbies? Yes, it matters.
- Gender: Women live longer and that explains why they typically have lower life insurance costs.
- How much coverage do you want? – What amount of death benefits you want? This is the main factor that reflects the costs. It directly impacts the premium you have pay.
Download the following chart (Factors That Affect Life Insurance Costs) in PDF for free.
Let’s Sum The Main Characteristics of Whole Life Insurance Type:
- Life-long protection
- Fixed payments that are the same each year
- Higher costs than term life policies
- Cash Value you can use for borrowing against or withdraw
- Guaranteed death benefit
Term Life Insurance: Definition, Advantages, and Disadvantages. Who Needs It?
What Is Term Life Insurance?
Term insurance is one of the two main types of life insurance that provides coverage for a certain period of time. This period is known as the term.
Term policies provide specific death benefits in the return for the policyholder’s payment of a premium.
Term life insurance is called also temporary insurance or pure insurance because there is no cash value, only death benefit protection.
In comparison to the permanent insurance (such as whole life, variable life, or universal life), the term is initially much less expensive and much more affordable.
There are many different types of term insurance policies on the market but here we will look at the term specific characteristics and opportunities.
That can be one year, 10 years, 15 years or even up to 30 years. You just have to pick the term accordingly your needs and goals. The crucial point here is if you die during that term, your family (or other your beneficiaries) get a payout – the death benefit. This death benefit is equal to the face value of the policy. If you die after the term expires, there’s no payout.
The Two Main Different Types of Term Insurance:
There are two main types of term policies on the market:
- Annual Renewable Term. This is a short term policy that can be renewed every year for a defined period of time. Typically, the annual renewable term brings the lowest annual premium to start, but the premium rises as you age. When the policy is renewed, the premiums go up, and it increases significantly after a period of 20 to 30 years.
- Level Premium Term. This is a policy which you buy for a specific multiyear period such as five, 10 or 20 years. It is one of the most preferable and common types of life insurance available. The key element here is that the amount of cover does not change over time. In other words, it won’t increase from the first year to the last.
Actually, people commonly buy level term insurance when they have a mortgage. The reason is that it provides security that your mortgage will be paid off when you die, so your family won’t have to cover the mortgage payments.
Also, there are many subtypes of term insurance such as modified, decreasing term life insurance and etc.
As the most popular types of life insurance, term type has some benefits, pros and cons we will list here:
Pros of Term Life Insurance:
- Affordable and Inexpensive. In the comparison to whole life insurance, term variety is much less expensive and much more affordable. Actually, it is among the most inexpensive policies on the market. Most people, as long as they have an income, can afford to buy these policies.
- More Flexibility – There are many different types and combinations of term life policies in order to suit your needs in the best way.
- Fixed rate throughout the contract period. This is a very valuable benefit for those that get this insurance at a young age. It ensures a long period with a low monthly payment. Young people can really buy significant face amounts at very low costs.
- Great for Short-Term Needs. Very good solution for some kinds of needs that will disappear within a shorter time. If the protection is needed for less than ten years, term life can be very suitable.
- An easy and simple process of switching to a permanent policy when it is needed.
- Easy to understand possibilities and options. As it is a basic life cover, there are no complicated and incomprehensible features. Term insurance plans are much easier to understand than whole life plans.
Term Insurance Cons:
- Do not have an investment or savings feature, like the cash value and dividends in permanent life policies.
- Sometimes renewing the policy can be impossible or very expensive. In other words, coverage ends when the term ends. For example, health issues can make it very difficult or impossible to you to get term policy. Once the contract term ends, it may be quite difficult to renew the insurance if there have been health problems during the original contract period.
- No Living Benefits. In ironical words, you have to die to win. You pay your premiums every year. 25 years later, you are still lucky and you didn’t die. You have nothing to get back from the insurance company. So, term life insurance does not give you any living benefits; it only pays if the insured person dies.
- A higher premium for smokers, those with serious health problems and etc. Despite the fact that term type is a low-cost insurance, it is still life insurance. It means all the personal characteristics and factors that influence the amount of the life insurance premium influence its term type too.
- Premiums increase as you age and they can become prohibitive at later stages. In other words, the premium payable for a term insurance policy increases with time. Term insurance is designed to be temporary and therefore will become cost prohibitive at some time.
There is a list of term life insurance pros and cons, advantages and disadvantage and they have a different priority for different individuals. Your needs, goals, and wishes determine wich types of life insurance are the best for you.
Download Term Life Insurance Pros and Cons Infographic in PDF
Who Needs Term Life Insurance?
As we mentioned above, term life insurance is designed to provide protection for your family for a specified period of time that you choose. The insurance lasts for as long as the term you select.
This has to be your starting point when you considering to choose term life policy or not.
Of course, there are a group of factors you should keep in mind:
Factor 1: The Costs And Your Budget
If your budget is tight and you want affordable life insurance, then term type is a good option as whole life and cash value insurance costs significantly more.
You can consider term insurance also if you are a person with low income but requiring a large cover to protect your family’s finances in case of your demise.
Actually, term life policy is so affordable that most people, as long as they have an income, can afford to buy it.
Factor 2: What Do You Want: Only A Death Benefit Or More?
When the insured person dies, the life insurance policy pays the face amount to a beneficiary.
You can buy term type of insurance for a long period – of one to 30 years, and the sum is guaranteed. If you seek only death benefit for your family (or other beneficiaries), term life is enough and a good choice.
However, if you want other benefits such as cash value (which is an investing and savings option), you can consider whole life insurance as an alternative.
Factor 3: Age
It is almost impossible to get term policy after 65.
Beyond 65 or 70 it becomes very difficult to buy term policy as most insurance companies do not offer it for people after these ages.
In case, you find a way to get it after 60, keep in mind that term insurance goes with some conditions, a high price, and other disadvantages.
Factor 4: The Period
If you need coverage only for a limited period, term life insurance is very appropriate.
For example, you may need coverage only while your children are in college, or while your business is in its start-up phase. In these cases, term life can be the answer.
Do not forget that term type of insurance is about the specific period. Then it works great.
Other Factors and Situations:
- Mortgage or other types of large loan.
Term insurance is also suitable if you have taken a large loan such as mortgage, car loan etc. It can provide peace of mind that your loan will be paid off when you die, so your family won’t have to cover the monthly payments. It is usual to take out a policy for the same term as the mortgage.
- Coverage for the risk of business loss.
Term type policies are a good opportunity to cover the risk of business loss due to a premature death of key persons by financially-strapped enterprises.
- Employee insurance
Term insurance is also used by employers to provide life protection to their employees – most commonly the labor class. It is a welfare measure at low cost.
- You know better and cheaper ways to invest your money.
Term policies do not provide a savings and investment option such as cash value that whole life insurance provide. But whole life policies are expensive and come with high costs. In addition to that, there are many more profitable ways to invest your money.
How Much Does Term Life Insurance Cost?
As one of the two main life insurance types, term rates mostly depend on your health profile. If you’re in a good health, then it’s easier to find a cheap insurance. But if you have health condition with a high-risk for your life, then the costs could be really higher.
Different companies have different ways to measure the risk.
Typically, the process of obtaining a quote from a company requires different types of medical exams.
You receive a quote from an insurer that depends on many other factors. In fact, they are the same factors that we listed above in the whole life insurance explanation. See them here.
Let’s Sum The Main Characteristics of Term Life Insurance Type:
- Pays a predetermined amount if the insured person dies during a specific period of time.
- Lower costs than permanent life policies. Very affordable and inexpensive.
- No savings and investment options such as cash value that whole life insurance offers.
- Help cover specific financial obligations such as a mortgage.
Now, let’s sum the key difference between the two main types of life insurance.
The key difference between term and whole life insurance is very simple to understand. Term life insurance pays a predetermined amount if the insured person dies during a specific period of time. For that reason, it is a cheaper option at an affordable price.
Whole life type offers protection for the entire life. The majority of whole life policies also provide a savings or investment component (cash value). For that reason, the premiums for whole life insurance are much more expensive.
Other Types Of Life Insurance
Despite the fact that the two major types of life insurance are the term and whole life, on the market, there are available also other types that have important meaning and benefits.
Here we will explain the most popular of them:
What is Universal Life Insurance?
Universal Life is a permanent type of insurance that combines the flexibility of the term insurance with cash value options that whole life insurance also provides.
In other words, a Universal Life policy is a form of permanent insurance that offers a high level of flexibility in premiums you have to pay. While it’s similar to a whole life variety, it’s better described as a much more adjustable life policy.
What is the Difference Between Universal Life and Whole Life Insurance?
For better understanding UL, let’s explain the difference between these two main types of permanent insurance.
Universal life insurance provides many of the same benefits as whole life policies such as cash value but offers more flexibility that allows you to adjust your premiums and coverage as your needs change.
When you buy a whole life policy, you pay a fixed premium rate that you aren’t able to adjust. The price you pay for your policy is unchangeable.
On the other hand, with a universal life policy, you can change and adjust your premiums (within the limits of your contract). You can possibly increase, decrease, or skip a payment (according to your contract).
Another key difference would be how the cash value accumulates. While the interest paid on UL is often adjusted monthly, interest on a whole life insurance policy is commonly adjusted annually.
Note: The information above is just a general summary of characteristics and may not reflect the features of any particular insurance product. Always carefully check the features of any insurance product consider to buy.
Variable Life Insurance
Variable life is also another form of permanent life coverage. These types of life insurance offer a death benefit, as well as a cash feature.
The key point here is that the policy owner can take part in a variety of different investment options such as equities, stocks, bonds.
Actually, variable life type combines the traditional protection and savings features of whole life insurance with the growth potential of investment funds.
The variable policy allows the insured person to set a part of the premiums to a separate account. This account contains different instruments and investment funds within the insurance company’s portfolio ( for example, bonds, stocks, money market funds, equity funds, bond funds and etc.)
What should you remember here is that variable life insurance funds can grow a great deal more than the funds in a whole life policy can. However, it also means that there is much more market risk for the policyholder.
As a type of the permanent life insurance, variable policies are much more expensive that term coverage.
Finding the best life insurance type for your specific needs is not an easy task and sometimes may cause a real headache.
Your choice depends on your goals, wishes, needs and knowledge about the different types of life insurance.
Term life insurance policies are the cheapest, simplest, the most often purchased and they provide protection for a specific period of time.
Permanent life insurance (and its forms whole life, universal and variable coverage) offer protection for the entire life, provide cash value element but are much more expensive than the term policies.
The both of the two main types of life insurance have their one pros and cons, advantages and disadvantages.
If you are not sure what is the best option for you, it is a very good idea to consult a trusted specialist or agent in this area.
After all, purchasing a life insurance policy is an important decision because, in the event of your death, it replaces your income for the people who you love.