ou’ve taken the first step and decided to shop for a life insurance policy. Life insurance provides financial support to your beneficiaries after your death, but there are several types of policies with variations in terms and benefits.
The best policy for you will depend on your circumstances, so it’s often a good idea to sit down with a trusted financial advisor or insurance broker to assess your options. This guide aims to help you start the conversation by explaining the different types of life insurance coverage, varying policy terms, and how to choose which policy is most suited for your needs.
What is Life Insurance?
Life insurance is a type of insurance that provides money to your chosen beneficiary when you die. You choose the type of policy and death benefits that you want, submit an application, and if you are accepted the insurance company promises to provide the specified amount of money to your beneficiary (this can be a relative, loved one, or even an organization) when you die, as long as you paid the required premiums.
What Are the Main Types of Life Insurance?
There are two principal types of life insurance: term and permanent. Term life insurance provides coverage for a specific time period or until you reach a certain age. By contrast, permanent life insurance lasts a lifetime. In both cases, the death benefit is guaranteed – that is, it will be paid to your beneficiaries after you die – provided you’ve kept the policy up to date and premiums have been paid on time.
Term life insurance
A term life insurance policy typically has the following features:
- Duration (term) of one to 30 years or longer or until a certain age
- Level premiums, meaning they won’t change while the policy is in effect
- Policy rates that vary based on your age and general health
- Relatively less expensive than a permanent life insurance policy.
- No savings or investment component, meaning there’s no cash value to withdraw or borrow against
- Can be purchased without a waiting period or medical exam in many cases
- May be converted to a permanent life insurance policy in some instances
- May refund premiums if the insured is still living after the term ends
Permanent life insurance
There are three primary types of permanent coverage available: whole life insurance, universal life insurance, and variable life insurance. Policy prices are based on your age, gender, overall health, and other personal data. In most cases, you will be required to get a medical exam before purchasing coverage.
All three types of policies have cash value that grows at a tax-deferred rate and can be accessed in the form of a loan or withdrawal while you’re still alive. You may also be able to access funds by surrendering the policy or using the cash value to pay your premiums. Utilizing or accessing the cash value in any way can directly impact the death benefit or have tax implications.
Whole life generally has the following features:
- Level premiums
- Very high monthly premiums, on average
- Cash value grows at set rate over time
Universal life generally has the following features:
- Premiums and death benefits can be adjusted
- High monthly premiums but cheaper than whole life
- Cash value grows at set minimum or market rate, depending on policy and insurer
Variable life generally has the following features:
- Premiums may be level or variable
- Policyholder can invest cash value account in stocks, bonds, and other financial instruments, depending on policy and insurer
- Cash value can grow or shrink, based on market performance
- May carry fees or surcharges related to investments
No-exam life insurance
As the name implies, no-exam life insurance does not require a medical exam to purchase a policy. However, that lack of a detailed health history means the insurance company is assuming greater risk in issuing your policy. As a result, premiums can be very high when compared to the amount of coverage provided. However, if you do not want to get a medical exam or have been denied coverage in the past for health reasons, a no-exam life insurance policy may be an option to consider.
There are two main types:
Simplified issue life insurance
- Can be a form of term or whole life insurance
- Must answer a few basic health questions prior to purchase
- Acceptance not guaranteed but likely if you meet basic criteria
- Coverage amounts usually $500,000 or less, depending on insurer and policy
Guaranteed issue life insurance
- Intended for older adults (ages 50 to 80) or those who don’t qualify for standard life insurance
- No health exam or medical questionnaire required
- Acceptance is guaranteed except in rare circumstances
- Death benefits are often graded, and the full amount may not be available for up to three years after the policy is active
- Coverage amounts usually $25,000 or less, depending on insurer and policy
- Lasts for the insured person’s lifetime, provided premiums are paid regularly