If you’re comparing life insurance policies, you’ve probably been introduced to several different types of life insurance. To answer “What types of life insurance do I need?” consider your options. All life insurance types provide asset protection and financial support to your beneficiary. Some types of insurance offer options for investment capital growth and income.
Your needs for life insurance may change over the years as you start a family, earn large amounts of income, start a business, or retire. The four primary types of non-variable life insurance policies include:
- Term life insurance
- Whole life insurance
- Universal life insurance (guarantee)
- Universal life insurance (index)
Each of these types of life insurance provide the policyholder’s beneficiary with a death benefit, but each may significantly differ in: 1) coverage length, 2) premium flexibility, 3) accumulation or distribution of the policy cash values, and 4) other factors. Use the descriptions to understand the primary differences before requesting a quote from any of the nation’s largest life insurance companies.
Types of Life Insurance: Term Life
Term life insurance is sometimes considered temporary life insurance because the term coverage length can be 10 to 30 years. You probably won’t build cash value in the insurance policy. Most people buy term life insurance for death benefit protection over a known period of time:
- Term coverage premiums may be lower in comparison to other types of life insurance, especially in the early policy years.
- Term life insurance offers a death benefit or cash payout if the insured dies within the defined period.
- As the term life contract approaches expiration, some insurers’ term policies may be converted to other types of life insurance or extended for a longer contract period.
If you decide to convert term life insurance or renew coverage, the new premium will increase as the risk of insuring your life rises. Some people consider whole life insurance to avoid the issue of life insurance expiration or conversion.
Types of Life Insurance: Whole Life
Whole life insurance offers a lifetime death benefit to your beneficiary in exchange for an established premium amount. A portion of your whole life insurance premiums build cash value that you can use while you’re alive.
Whole life insurance’s value proposition is simple. You’re guaranteed a certain cash value return as well as death benefits in exchange for fixed premium payments. However, a whole life policy is unlikely to grow cash value at a lower rate than other types of insurance or investment vehicles.
Types of Life Insurance: Guarantee Universal Life Insurance
As you research types of life insurance, you’re likely to come across guarantee universal life policies. This type of life insurance provides a death benefit and offers the opportunity to build cash value. However, guarantee universal life differs from whole life or term life insurance policies because you have some flexibility about when and how much to pay in premiums:
- In many cases, you can increase or decrease the beneficiary’s death benefit as long as you’re insurable.
- If you maintain enough policy value and keep the policy in force, the guaranteed universal life policy allows you to remit premiums within reason and according to current financial circumstances.
- Your guaranteed universal life insurance’s cash value is calculated by the premiums paid, the amount of interest credit declared by the insurer, and incremental policy changes if any.
Guaranteed universal life can offer more flexibility than a whole life policy, but you assume added risk. You may have less policy guarantees than a whole life insurance contract. It’s essentially up to you to manage premium payments. You’ll need to keep track of distributions to ensure that the policy remains in force.
Most guaranteed universal life policies provide the policyholder with a no-lapse guarantee that covers the life of the insured or a lesser period but sufficient premiums must be paid to enjoy this feature.
Types of Life Insurance: Index Universal Life Insurance
Index universal life insurance offers flexible premium payments and the ability to dial down your death benefit to the beneficiary. In addition, index universal life may offer the opportunity to grow cash value at higher rates than variable rate policies.
An index universal life policy links cash value growth to the percent change of a financial index, including Dow Jones Industrial Average (DJIA), S&P 500® Index, and NASDAQ 100®. If desired, most insurers can link a fixed rate interest to policy cash value.
- Insurers of index universal life policies may have a cap and floor to limit maximum and minimum returns. Interest credited to the policy is established between the minimum and maximum levels.
- Your index universal life policy can earn higher rates than traditional whole life cash value policies.
- Your downside risk protection may be better with some variable universal life policies but buying variable life can also limit upside potential.
Most people buy index universal life insurance to secure a death benefit for a beneficiary while offering the option of greater flexibility to the insured. The cash accumulation of the index life insurance policy provides the death beneath and allows the insured to accumulate cash value that may be used as income or as a policy loan or tax-free withdrawal at some point in the policyholder’s life.
Types of Life Insurance: Policy Rider
In addition to different types of life insurance, optional riders to your insurance policy can make sense for you. Riders, sometimes called endorsements, make it possible to add coverage to the policy according to your needs. You can add dependents, add future income or financial relief if you’re disabled, or increase the policy payout if you’re involve in an accident. Ask an advisor about riders to customize your life insurance policy.