Types of Life insurance

Aug 20, 2023




When it comes to life insurance, there are five primary kinds to select from. Here’s a summary of what each one covers. The purpose of life insurance is to assist in decreasing the financial stress on your family members when the inevitable occurs. 

However, every life insurance policy is unique. Whether you want to guarantee that your spouse can continue to pay the bills in the event of your unexpected death or want to cover your funeral expenses, the most suitable type of life insurance ultimately depends on your requirements and financial plan.

Types of life insurance

These are the most basic types of life insurance on the market and what each covers.

Term life insurance

When it comes to life insurance, term life insurance is often the best choice for most individuals. This policy is straightforward and affordable, providing a payout to your beneficiaries in the event of your passing. Term life insurance is typically available for one, five, 10, 15, 20, 25, or 30-year periods, and the coverage amount can go up to millions of dollars.

One of the biggest advantages of term life insurance is that it’s generally the most affordable option. It’s also sufficient for most people, as it provides coverage during your prime working years. If you pass away during this time, your beneficiaries can use the payout to meet short-term financial needs, such as paying off a mortgage or supporting your children’s education.

However, there are also some drawbacks to term life insurance. If you outlive your policy, your beneficiaries won’t receive a payout. Additionally, if you want coverage beyond the term of your policy, you’ll need to purchase a new policy, which can be more expensive as you age.

Despite these drawbacks, term life insurance remains a popular and practical choice for many individuals. It’s important to carefully consider your options and consult with a financial advisor to determine the best life insurance policy for your unique needs and situation.

Whole life insurance

Whole life insurance is an excellent choice for those who are looking for a permanent policy that is simple and straightforward. As long as premium payments are made on time, whole life insurance provides coverage for your entire life. The premiums remain the same, and the policy’s cash value offers a guaranteed rate of return. Additionally, the death benefit amount remains unchanged, which can provide peace of mind for policyholders. 

Furthermore, whole life insurance builds cash value over time, making it a valuable asset. This cash value can be accessed through loans or withdrawals, which can be useful for unexpected expenses or emergencies. 

However, it is important to note that whole life insurance is typically more expensive than term life insurance. This means there may be better options for those concerned about affordability. Exploring other options and comparing rates is essential before deciding on a policy. 

In summary, whole life insurance is an excellent choice for individuals who are seeking a permanent policy that is simple and straightforward. It offers a guaranteed rate of return, and the death benefit amount remains unchanged. Additionally, the cash value can be a valuable asset. However, it is important to consider the cost and explore other options before deciding on a policy.

Universal life insurance

Universal life insurance is a great option for people who want a permanent life insurance policy that can adapt to their future needs. This type of coverage allows you to adjust your premiums within certain limits and has a cash value component that grows based on market interest rates. Unlike whole life insurance, universal life insurance is typically less expensive and can adapt to your changing needs as life progresses.

Pros:

  1. Flexibility: Universal life insurance policies can adapt to your changing needs as you age, such as increasing or decreasing your premiums or changing the death benefit amount.
  2. Cash value growth potential: The policy’s cash value component grows based on market interest rates, which can earn you more money than a traditional savings account.
  3. Lower premiums: Universal life insurance is generally less expensive than whole life insurance, making it a more affordable option for those who want permanent coverage.

Cons:

  1. Risks: Because the cash value growth is tied to market interest rates, there is some risk involved. If the market performs poorly, the cash value may grow less than you expected.
  2. No guarantees: Unlike whole life insurance, a universal life insurance policy’s death benefit and cash value growth are not guaranteed. This means that if the policy performs poorly, you may not receive the payout you expected.
  3. Increasing premiums: Premiums for universal life insurance policies typically increase over time, which can make it difficult to keep up with the payments as you age. If you can’t afford the premiums, you may need to reduce your coverage or dip into your cash value account to cover the costs.

Variable life insurance

If you have a higher risk tolerance and want greater control over your cash value investments, variable life insurance might be the right choice for you. This type of cash value life insurance is tied to investment accounts, like bonds and mutual funds, allowing for potential considerable gains if your investment choices do well. However, it requires you to be hands-on in managing your policy because the cash value can change daily based on the market.

One of the pros of variable life insurance is that it offers the potential for high investment returns. This can be especially appealing for those comfortable with taking risks and wanting to maximize their returns. Additionally, variable life insurance policies typically have fixed premiums, and the death benefit is guaranteed, regardless of how the market fares. This provides a level of security and peace of mind for policyholders.

On the other hand, one of the cons of variable life insurance is that it requires active management. Because the policy’s cash value is tied to investment accounts, policyholders need to stay on top of their investments and make adjustments as necessary to ensure they are getting the most out of their policy. This can be time-consuming and may require some level of financial expertise. Additionally, because the cash value is tied to the market, there is always a risk that the value of the policy could decrease if the market performs poorly.

If you are considering a variable life insurance policy, working with a fee-only financial advisor is important. A planner who doesn’t earn commissions based on product sales can help you choose the best policy for your needs and manage your investments. By doing your due diligence and staying on top of your policy, you can potentially reap the rewards of the higher risk associated with variable life insurance.

Burial insurance

Burial insurance, also known as final expense insurance, is a small whole-life insurance policy designed to help your family cover the costs of your funeral, burial, outstanding medical bills, and other end-of-life expenses. This type of insurance is ideal for people who want to ensure that their loved ones will not be burdened with the cost of their final expenses.

One of the main advantages of burial insurance is that a medical exam is typically not required. This makes it more accessible to seniors with pre-existing health conditions, who may not be able to obtain traditional life insurance policies. Additionally, the death benefit is guaranteed and usually ranges from $5,000 to $25,000, which can provide peace of mind to policyholders and their families.

On the other hand, one of the disadvantages of burial insurance is that the coverage is capped at relatively low amounts. This means that if you are looking for a more substantial payout, you may need to consider other types of life insurance policies. Another disadvantage is that your insurer may not pay the full death benefit if you pass away within two or three years of taking out your policy. This is known as the “contestability period,” and it is something to keep in mind when considering burial insurance.

Overall, burial insurance is a great option for people who want to ensure that their final expenses are covered without burdening their loved ones. While there are some limitations to this type of insurance, the guaranteed death benefit and lack of medical exam make it a viable option for many seniors. To determine if burial insurance is right for you, it’s best to speak with a licensed insurance agent who can help you evaluate your needs and find the best policy for your situation.